If you have ever wondered why you still struggle to make ends meet even though you make twice as much now as you did years ago; you might be a victim of the dreaded lifestyle creep. But how can you combat this sneaky little wealth destroyer?
Lifestyle creep is what happens when your lifestyle improves concurrently with your income. In order to prevent lifestyle creep, identify your wants and your needs and be willing to delay gratification of your wants in lieu of saving. What follows is a list of hacks that will help to prevent this pesky little creature from creeping into your life and destroying your financial well being.
What is lifestyle creep
If you have fallen victim to lifestyle creep you probably found yourself sitting around one day asking yourself, How the hell did this happen? It is called lifestyle creep for a reason. It creeps up on you.
First off what exactly is lifestyle creep? Lifestyle creep is what happens when your life style improves concurrently with your income. As your income rises, so does your spending.
How does lifestyle creep happen
Lifestyle creep happens gradually over an extended period of time, making it difficult for you to notice. As your cash flow expands, it is easier to justify spending more money on frivolous things or leisure activities.
Whereas you might skip drinks after work due to lack of money, once you receive a raise and have more money available, why not join the gang for a drink. Then another raise comes along and you might upgrade your car. Before you know it you have a fancy car, a house full of rooms you never use and 4 different machines to make a smoothie. And you don’t even drink smoothies. You laugh but have a look around your home at how much stuff you own that never or rarely gets used. How much stuff you own that is not needed that cost you money that you now wish you could have back.
Lifestyle creep is a dangerous psychological trap that we fall into as our incomes grow. It is dangerous because in the end it can leave you penniless at a time when you need that money the most. If you don’t have will power and defeat lifestyle creep, easy to fall behind: you may never have the chance to make up the difference. Not only that, but if you don’t start saving now, you will also miss out on the compound interest that the extra savings would have earned.
Check out this article on how compound interest will make you rich and prepare to have your mind blown.
Prevention Methods: Tips and Hacks that actually work
Preventing lifestyle creep isn’t easy. As with anything, you will find it easier to succeed if you have a plan. Here are some tips and tricks that I have found helpful in my own battle against lifestyle creep.
Use different accounts
If all of your money is in one account it may make it easier for you to track all of your expenses. However, it also makes it easier for you to overspend and not have funds available for necessities. I’ll give you an example.
My wife and I pay our property taxes once a year separate from our mortgage. What we do is directly deposit a set amount of our paycheck directly into a separate account from our checking or savings that we use daily. This money sits untouched all year until it is time to pay the property taxes.
We also have 3 separate investment accounts with 3 separate trading brokerages. These 3 accounts have very different holdings and the goals of each are different.
We have our main checking and savings accounts that are linked and used for every day activity and monthly bills. Then we have 2 other savings accounts. One is our emergency fund and the other is our fun money.
As you can see, I have a bunch of different accounts (that’s not even all of them). This helps to control spending in the moment. The money is already accounted for. If we want to buy something, we look in the fund that that purchase would come out of and see if the money is available. The decision has already been made. Emotion has been removed from the decision making process. (Beware credit cards in this scenario)
Automate
This would be much more difficult if it wasn’t for automation. All of our depostis are automated. We might move some funds from savings to checking temporarily to cover a bill until payday but for the most part everything is set.
We NEVER touch the automated deposits that go directly into out property tax account or any of the investment accounts. Those amounts are set and will only change when it is time to increase the deposits.
Automation again takes the decision making away from you and forces you to be disciplined. I think of it like income taxes. They take that money away from you before you can even get a whiff and you don’t miss it.
Imagine if they taxed you another 15% on top of what you are already being taxed. What would you do? I’ll tell you exactly what you would do. You would pay it! So pay yourself through automation and it will have the same impact on you as the government taking taxes out of your income.
Trick yourself – put money where you can’t touch it
As I mentioned earlier, I have a separate savings account which holds the money for my property taxes. I have no check book for that account, it is not linked to my other accounts and I have no access to it on the internet. I can not touch it. That is until it is time to pay the tax man.
I, in effect, trick myself into saving money using this technique. There are times during the year that I forget this account exists entirely and go into a panic about my taxes being paid. I have to actually go check to be sure the money is there. Sure enough, there it is, every time.
If you automate your deposits into different accounts, the odds increase that the money will actually go to its intended use.
Budget
Before you begin to separate all of your income into different account, you will want to make a budget. After all, how will you know how much to put in each account?
You may want to have separate accounts for each of your large bills such as mortgage, taxes, cars, college fund, to name a few. It is entirely up to you.
Go on a diet – bring your food to work, eat what is in your fridge, freezer, closets
Similar to the amount of junk you have sitting around the house you need to look at how much uneaten food you are wasting. Go look in your freezer or your cabinets. Are you really eating all of that or is it just going to waste?
I found that one way to improve my life over all is simply bringing my food to work. This accomplishes the following.
- It eliminates the desire to spend money needlessly on lunch while at work.
- I save money by assuring I use ALL of the food I purchase
- It forces me to take inventory of how much food I am wasting and be more mindful next time I shop.
- I save on space and clutter in the home
- It is more healthy then the slice of pizza and coke I was having for lunch.
- I feel better about not being wasteful
Lets focus on the financial benefits since this is an article about your finances. By bringing your lunch to work you are utilizing just one more hack to improve your financial situation. Now sack away the money you saved.
Speaking of saving money, check out these 10 insanely easy ways to cut spending.
Buy a used car
Are you a chauffeur? If the answer is no then you don’t need a new car. Believe me, I understand the convenience factor of never having to worry about turning the key and hearing that dreadful noise of a car struggling to start.
Try driving a 1989 Buick Skyhawk Sedan in 2001. That’s what I did. For 2 years. I paid $400 for that car and got 2 years out of it. Yes it broke down from time to time. And yes this was a very extreme measure that I needed to take, but this is what happens when you allow lifestyle creep to, well, creep into your life.
Look a car payment will cost you somewhere in the range of $200 – $500 a month plus the added insurance required. In most cases, a used car will do just fine. If you think you need to havr a car payment, you need to take a serious look at why and convince yourself otherwise.
Every time you get a raise, save it
The best advice I can give to avoid lifestyle creep is to do the exact opposite of what is causing the problem. The definition of lifestyle creep is the slow and steady increase in your spending which runs parallel with your salary. So instead of spending the money every time you get a raise, do the opposite and save it.
I understand you are not going to live your entire life the way you did when you were an entry level employee bagging groceries at the shop mart. However, once you get settled into a career and a salary, you need to make that your ceiling and learn to live within your means. Then and only then can you start saving your raises. This should be easy if you combine all the other techniques discussed here.
Imagine saving every raise you received from age 25 – 55 and investing it in a low cost index fund. If you are 55 and reading this, go do the math and come back to read the rest of this article after you finish puking. I’ll wait.
For those of you who are 25, imagine receiving just a measly $1000 raise every year for the next 30 years. I know that isn’t much and you will probably earn a lot more but lets be conservative for this estimate and stick with $1000. You think 30 years times $1000 a year is $30,000 right? Nope! It is almost $100,000 if you invest wisely and earn 7% per year.
That.s an extra $100,000 for your retirement just by showing a little self control with the extra money you are earning each year. By the way, that $1000 raise works out to $2.74 per day. That is about the cost of a cup of coffee. Not a very big sacrifice to make if you ask me.
The Bottom Line
The bottom line of all of this is that you DO NOT need to fall into the lifestyle creep trap. Use the methods detailed in here to live a better life.
I understand the temptation to upgrade your standard of living when you start making more raises. I fell for it myself a few times. But you need to stay strong and remember that it is only hurting your ultimate goal of long term happiness. The rush you feel initially from spending the money is fleeting. The peace of mind that comes along with Financial Independence can not be matched.
Good luck and thanks for reading
Earl
If you are enjoying learning about personal finance and early retirement, check out the 20 personal finance books that changed my life. I have included easy links to the amazon site for each book so you can easily find the least expensive option should you be interested.