By Jovan Johnson, MBA, CFP®, CPA/PFS
Whether you just finished residency or received a promotion, lifestyle creep is real! Do you really need that new BMW and luxury condo? If you are like me, once you receive a significant raise or bonus, you begin to think of all of the possible ways you could potentially spend that money. I mean, after years of sacrificing and living off peanut butter and jelly sandwiches, getting a raise or bonus feels like the lottery. However, it is important to invest in yourself first. For every dollar that comes in, you should commit at least 15% to investing back into yourself.
What Is Lifestyle Creep?
Lifestyle creep, sometimes referred to as lifestyle inflation, is the act of upgrading your standard of living as your discretionary income increases. This can keep you stuck in a bad financial cycle, while preventing you from building an emergency fund or properly saving for retirement.
In this article, I am going to discuss ways that you can resist lifestyle inflation as your income increases.
Create a Zero-Based Budget
Listen to what your budget is telling you, not the income number on your pay stub.
Establishing a realistic budget is key. That way if your income increases, the portion you save vs. spend will remain the same. A Zero-Based Budget is where you assign each dollar that comes in a job. The end goal is to have $0 leftover each month. You can start with the 50-30-20 rule. 50% for needs, 30% for wants/giving, and 20% for savings (paying off debt falls in this category). Make sure you always invest in yourself first.
Start saving with a small percentage, like 10% of each paycheck, to get in the habit. Then, at the end of each month, increase that amount by 1% until you reach your monthly savings goal.
There are apps like YNAB (You Need A Budget) or Mint to assist with creating a budget.
Automate Paying Yourself First
To avoid the temptation of overspending on “wants”, put your savings on autopilot.
Treat your savings like another monthly expense. Create at least 5 separate accounts: short-term savings (emergency fund/irregular expenses), long-term savings (emergency fund, retirement accounts), checking account for everyday expenses, checking account for bills & utilities, and a checking account for fun. Then update your direct deposit account preferences at work, to have your paycheck split between your various checking and savings accounts. This will remove you and your emotions out of the equation.
Create a Splurge Fund
It is important to reward yourself sometimes for all of your hard work.
However, you must do so in a way that is strategic. Including a “fun” category in your budget will help you not feel guilty for treating yourself. I mean, if spending $300 on some new shoes is in the budget, then enjoy it!
With a 50-30-20 budget, you will get to enjoy up to 30% of any raise or bonus. For instance, let’s say you get a raise of $1,000 per month. $500 will be allocated to needs, $300 to wants/giving, and $200 to savings.
Keep Your Eyes on the Big Picture
Lifestyle inflation can be a real threat to your long-term goals such as: purchasing a home, purchasing a new car, traveling outside of the country, purchasing rental properties, or paying for a child’s college education.
Write down all of your long-term goals and the finances that would be required to fund them. Revisit this list frequently, to always remember why you are saving money. When making a purchase, ask yourself is it worth it to take money away from my long-term goals? Some purchases may seem small at the moment. For instance, spending $5 per day on Starbucks seems harmless right? However, that accumulates to a total annual cost of $1,825. As you can see, small purchases add up very quickly and can hinder you from building up your savings.
Bonus: If Your Bank Allows, Set Up Custom Alerts
Custom alerts are a great way to avoid overspending (overdraft fee) and potentially detect fraud early.
Set up alerts with your bank to be notified whenever your account reaches a certain dollar limit. This is very helpful to keep you on track with your budget. Let’s say you create an alert for your “fun” account whenever the account balance is less than $50. This is a cue for you to dial down your spending on wants for the remainder of the month.
Conclusion
Taking control of your finances is a journey, not a destination. After years of hard work and sacrifice, you deserve to enjoy your money and treat yourself. However, you must do so in a strategic way that doesn’t sacrifice your long-term financial goals. Follow the tips outlined in this article to be in “control” of your financial situation and keep lifestyle inflation in check.
Disclosures
None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning, LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
