Lifestyle Creep (4/26/2018)
Our New England winter finally appears to be subsiding into some warmer weather. As we shed our heavy winter clothing for lighter gear, we may find that some of our clothes don’t fit due to weight gain. If you are not weighing yourself regularly, this could come as a surprise to you. You were comfortable in your winter gear, but revisiting your warm weather clothing shows you the change.
In a similar fashion, “lifestyle creep” can happen to us in our financial lives. Early in their careers, most people establish a lifestyle, with their spending based on income and needs. They often then receive a raise or earn a little more than they did the year before, and it becomes easy to add a few extras to their regular spending.
It starts with trivial things like adding a premium channel to your cable, upgrades to your phone or maybe more expensive food items. You may start paying a little more for a better airplane seat or a nicer hotel or by giving in to impulse items while shopping online or at your local stores. Each of these items might be a relatively small increase individually, but they can start to add up collectively. The process is so gradual that you probably don’t realize you are doing it. Once you are used to the upgrades, eliminating them becomes very hard to do.
Inflation in your lifestyle isn’t a terrible thing, but you do not want the subtle upticks in your expenses to reach a point where they make reaching your longer-term goals more difficult.
Research from the Federal Reserve Bank of New York shows that most people’s pay increases will occur in their early working years before leveling off in mid-career and peaking in their 50s. A study from the Labor Department shows comparable results, with the higher wage growth happening earlier and then continuing at a slower pace in the later working years.
That tells us that it’s important to keep the lifestyle creep under control when you do receive increases in income. If you automate your deposits to allocate a pay increase or a portion of it to your savings first it will help you maintain balance and stay regulated within your current level of spending. As your savings grow, you might find that you do have extra funding for splurges.
A key factor of a successful financial plan is to determine what you generally spend, categorized as discretionary (wants) and nondiscretionary (needs) expenses. Being mindful of your consumption allows you to plan accordingly and maintain your desired lifestyle.
Posted April 26, 2018