Understanding lifestyle creep – and how to avoid it

Lifestyle creep is a problem because it can prevent people from saving the right amount they need for retirement or emergencies.

  • Lifestyle creep is the common pattern of spending more money when you earn more money and getting used to higher levels of luxury and convenience as your new normal.
  • Lifestyle creep typically occurs after someone gets a raise, a new job with a higher income, or pays off debt.
  • The biggest sign of lifestyle creep is a lack of savings for emergency or retirement funds.
  • Read more stories from Personal Finance Insider.

You may think that a raise means you have more money in your bank account, but that's not always true. In fact, a lifestyle creep can leave you with less money on hand.

Lifestyle creep or lifestyle inflation is extra spending after your income increases. For example, if you get a new job that pays you 20.000 more per year in net pay, but decide to buy a (non-essential) car for 30.000 U.S. dollars to buy, you have more debt than you did before your salary increase. Lifestyle creep can take place over a period of years, making it difficult to detect – unless you've maxed out your budget.

Here's what you should know about lifestyle creep, how to tell if it's affecting your life, and how to avoid it in the future.

What is Lifestyle Creep?

Lifestyle creep is an increase in spending after receiving a raise, rather than saving the extra income. It can also happen after you pay off a loan if you decide to spend the extra money instead of diverting it to savings.

"I've seen clients who make more money actually make their financial plans look worse because of lifestyle creep," says Clint Camua, regional director and partner at EP Wealth Advisors in the Los Angeles area.

In cases of lifestyle inflation, the extra items like entertainment subscriptions and restaurant dinners that you did without before your income increase now seem essential. It's not just about buying things – paying for new experiences can also have an impact on your lifestyle.

"One example is a couple who recently paid off their mortgage and want to spend the extra cash flow from the monthly mortgage payment on more travel," says Robin Aiken, principal at Homrich Berg Wealth Management. Instead of diverting some or all of their newfound funds into a savings account, this couple wanted to use the entire amount for travel expenses.

How Lifestyle Creep works?

Typically, lifestyle creep occurs when people start earning more money, either through increased income from a new job or a raise, or by paying off debt and freeing up money that was used for monthly payments. Once lifestyle inflation takes over, the new money is spent as fast – or faster than – it comes in.

Lifestyle creep is a problem because it can prevent people from saving the right amount they need for retirement or emergencies. About half of U.S. workers claim debt payments prevent them from saving enough for retirement. Of course, not all debt is due to lifestyle creep. But if your extra spending is on unnecessary purchases, lifestyle creep is a likely culprit.

It's normal for your lifestyle expenses to increase as you earn a better income. You want to treat yourself after working hard to earn that money. "It becomes problematic when the increase in lifestyle exceeds the increase in income," Camua says. "It then affects your ability to save for retirement, depletes your emergency fund or increases debt."

Lifestyle Creep can happen to anyone – no one is immune. It doesn't require you to earn six figures, and you're not off the hook because you didn't buy a sports car. Lifestyle creep can affect everyday earners as well as wealthier households. Anyone can be convinced that they have to eat out most evenings because they can't find time to cook, or that their new job requires them to buy new office clothes every few weeks.

Quick tip: No one has the perfect budget or spending pattern. However, reviewing your spending often helps you adjust quickly if you've veered off course. Otherwise, you could cut your savings goals for years, which would have a much bigger financial impact.

Signs of Lifestyle Creep

  1. Your savings are stagnant. "If the amount you're saving has stayed the same even after a few years of raises and bonuses at work, that's a sign you're spending all the extra money you earn each year," Aiken says. Not prioritizing savings can be disastrous for your overall financial health.
  2. Your expenses have increased in many (or most) areas of your life. If you notice you're spending more money in general because you feel like you can afford it, a lifestyle creep may be a factor. You may eat out more often, buy more expensive gifts, take more expensive vacations and sign up for several new memberships.
  3. You do not budget. It's easy for lifestyle lurkers to take over when you don't know where your money is going. If you don't know how much money is going toward extra expenses each month, you may be overspending without even realizing it.
  4. You feel like you don't have a handle on your finances. You may be stressed every time you check your account balance because you know you've spent too much. Or you look with fear and regret at your dwindling savings or growing credit card balances. This sense might tell you that your lifestyle exceeds your income.

How to prevent lifestyle creep

There are several strategies experts recommend to prevent you from falling victim to lifestyle creep. First and foremost, create a budget. By reviewing your budget frequently, you can make sure your spending stays in line. "If you find that you're putting resources toward, say, another car or a vacation home – probably a more extreme case of lifestyle creep – confirm that this won't derail your plan," Camua says.

Also lock in emergency funds and retirement savings in particular. "It is important to always ensure that any additional spending to improve lifestyle is done after ensuring that an emergency fund is in place, retirement savings are not cut and consumer debt does not increase," says Camua. If you do your best not to increase credit card or loan debt after a raise, make sure you don't negate the benefits of the raise.

Once your savings are in order, any long-term consequences of overspending will be minimized. And Aiken recommends making saving as simple as possible. You can set up automatic transfers to your savings accounts that take place on payday, so you don't have time to spend the money.

Quick tip: you can plan for salary increases in advance. Aiken suggests increasing your 401(k) contributions every time you get a raise or bonus. In this way, you do not have to sacrifice anything in terms of your current lifestyle – and still save.

And last but not least, don't stress about rare, small wastes. "Don't forget to indulge yourself occasionally," says Aiken. Focus on the big picture instead.

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