Financial Watch | August 2021

How to Keep Lifestyle Creep from Derailing Your Financial Goals

Looking back on your first fulltime job, do you ever remember thinking, “If I made ’X‘ dollars more, things would be so much easier”? However, once you received your first raise, you may have been surprised at how quickly that extra money was absorbed into your regular monthly spending. You can thank lifestyle creep for that.

What is lifestyle creep?

Lifestyle creep happens when you increase your spending and expenses with each raise or bump in income. Despite making more money, you continue to live paycheck to paycheck, with little or no money set aside for the future. Interestingly, there’s no magical dollar amount or salary where lifestyle creep automatically kicks out. You are susceptible to it whether you make $30,000 or $300,000 a year.

Although challenging, breaking the endless cycle of living paycheck to paycheck is possible. Below are five practical ways to help stop lifestyle creep and begin building wealth for the future you desire.

1. Live within your means

Living within your means is the golden rule of financial well-being. That’s because it helps you to move closer to any goal faster. Living within your means requires spending less money than you’re bringing in each month.

Spending less than you make allows you to:

• Budget money for unexpected expenses
• Save for short-term goals, like buying a house or car
• Set money aside for future goals, such as retirement
• Pay down existing debt
• Avoid racking up costly credit card debt

There is one catch: living within your means requires some discipline. That’s where a budget can help. Your budget can help you track each dollar coming into and leaving your household each month. It’s a great tool for creating accountability around your spending and savings goals. Follow this link to learn more about the latest budgeting tools and apps: Here are the best budgeting apps of August 2021.

2. Differentiate wants versus needs

Recognizing the difference between wants and needs can be challenging. Needs are your essential expenses—the things you absolutely can’t live without, such as food, housing, clothing, healthcare and transportation. Wants are the things that are important to you and help define your lifestyle but would not jeopardize your health and safety if you were forced to live without them. Your wants are discretionary expenses, such as your afternoon latte, concert tickets or a weekend getaway.

When determining your monthly budget or spending plan, make sure your essential expenses are fully covered first. Then prioritize additional spending for the things you want but could live without, if necessary. Finally, set aside money each month for savings, even if it’s just a small amount. When you do get a raise, increase this amount first. That will help you stay on track toward building the wealth you will need to support the future you want.

3. Use credit sparingly

While credit cards may allow you to buy more things now than your current budget allows, keep in mind that can come with a cost. If you consistently use credit cards to bridge the gap between income and expenses, or purchase more than you pay off each month, you'll eventually run out of available credit and possibly lower your credit score. In addition, high interest rates can make it even more difficult to pay down debt and get back to living within your means.

4. Forget about the Joneses

Resist the pressure to keep up with the spending patterns of neighbors, coworkers or friends. While the shiny new car in your neighbor’s driveway or a coworker’s recent trip to Cancun may appear to be a sign of financial success, they could just as easily be living well beyond their means. Keep in mind, material accumulation is not a dependable gauge of how well someone is doing financially. While there’s nothing wrong with the occasional splurge on something you really want—if you’re prioritizing your finances correctly—problems occur when you jeopardize your financial well-being to compete with others.

5. Stick to a plan

The best way to reverse lifestyle creep is to put a plan in place and stick to it. The financial planning process can help you prioritize goals and spending, so you can build future wealth faster. Since planning is an ongoing process, it’s easy to update and adjust your savings and spending goals as your life or circumstances outside of your control, such as the financial markets and economy, change.

There are many benefits to breaking the cycle of living paycheck to paycheck, including reducing stress and increasing overall financial well-being. If you have questions about putting a strategy in place that can help you move closer to your goals, call the office to schedule time to talk.

^{This information was written by KRW Creative Concepts, a non-affiliate of the broker-dealer.}