Perhaps the pattern sounds familiar. Your employer rewards you with a substantial raise, so you reward yourself with a vacation to a posh beach resort. Or your spouse returns to the workforce, and you use the extra paycheck to put a new Mercedes in the driveway.
Those congratulatory purchases – often meant to give yourself an emotional boost, however fleeting – probably seem harmless enough. You’ve got some money, so why not spend it?
The problem is, you’re taking fantastic opportunities to build wealth and realize your long-term goals and throwing them down the proverbial crapper. Financial gurus have a name for it: lifestyle creep. Your earnings are going up, but your spending is accelerating almost as quickly. So you’re not actually making yourself financially better off than you were before you found out about your raise or became a two-income household again.
What is Lifestyle Creep?
Lifestyle creep has a couple important components, according to Derek Hagen, a planner and financial behavior expert in Minnetonka, Minnesota. One is that it’s accidental rather than intentional. Actively working toward a bigger house that can comfortably fit your growing family is one thing. So is stowing away some cash so your children can go to music camp. Impulsively decking out your man cave because you can? That’s something quite different.
The other hallmark of lifestyle creep: You’re spending money on things that give you an ephemeral pick-me-up, at best. That is, it’s not really adding much to your happiness, even though it’s starving your bank account.
Often, Hagen says people feel social pressures when they advance in their career and suddenly find themselves working with successful peers who aren’t necessarily living a middle-class lifestyle. Suddenly there’s a feeling of what Hagen calls “relative deprivation.” In other words, there’s a sense that you have to keep up with the Joneses or you’re losing the game.
So what’s the big deal with a spend-it-as-you-make-it mentality? If you’re still hitting your long-term financial goals, perhaps it’s a fairly benign pattern. But many Americans aren’t so fortunate, as evidenced by a litany of troubling data points.
For instance, there’s the fact that a typical adult in the 35-44 age bracket has just $60,000 in his retirement kitty, according to a 2019 Federal Reserve survey (three times your salary is the typical guidepost for someone age 40, according to one analysis by Fidelity Investments). And then there’s the Fed survey’s finding that more than one-third of Americans wouldn’t be able to pay a $400 unexpected expense with cash or their savings account.
As you enter your prime-earning years — a phase that often corresponds with paying off student loans — you should be beefing up your savings and investment accounts, not watching them stagnate. “If you have a comfortable lifestyle, there should be no reason for your cost of living to increase,” says Hagen.
How to Beat Back Lifestyle Creep
How do you keep lifestyle creep from taking hold, exactly? The fact that it happens unintentionally can make it tough. One step that Hagen recommends is articulating your financial “purpose.” That means identifying what actually gives you and your family real, lasting enjoyment — whether it’s the satisfaction of starting a new business or going on more family getaways — so you don’t get drawn in by other spending traps along the way.
“If you get raises, you’re still grounded to that lifestyle you envisioned,” he says.
Hagen also likes the idea of framing money decisions as a choice between your present self versus your future self. Thinking in those terms, he says, can help drive home the idea that you’re the victim of your own impulsive spending habits, even if you don’t suffer the consequences until years down the road.
“When we say we can afford something, we’re usually talking about ‘me’ today,” says Hagen. “But any money I use today is money that future me doesn’t get to spend.”
Saving enough for your future self gets a lot easier, of course, when you’re creating a household budget and tracking how much cash you’re actually burning through each month. Fortunately, the market is pretty much flooded with great apps that make totaling up and analyzing your spending a matter of a few simple clicks.
A dose of self-awareness, in and of itself, can be a life-changer. If your cumulative restaurant bills are creeping above your pre-established threshold, for instance, at least you can tamp it down before it spins out of control. Your future self will probably thank you. “When you save extra income, it buys you flexibility and freedom later on,” says Hagen.