Beware of the “Lifestyle Creep”
Sometimes more money can mean more problems.
Provided by Trenton J. Adams, CFP®
Lifestyle Creep is an unusual phrase describing an all-too-common problem: the more money people earn, the more money they tend to spend.
For me—straight out of college into the world of financial planning—Lifestyle Creep wasn’t an issue. I was broke, feasting on Ramen Noodle, and washing it down with off-brand Coke. Several years later, as my income began to climb, I’ll be darned if I let that Lifestyle Creep in the door…
There she was, glistening from front bumper to trailer hitch, taunting me from the showroom floor—my dream car (truck). I had to have her. I knew she was too expensive, but it didn’t matter. I just got a raise and I was going to spend it. For the first 30 days I didn’t regret my decision. I was as happy as Joe Diffie’s “Pickup Man” while I fought Atlanta traffic.
Then it came. The first payment was due. What have I done? Although I could afford the payment, it didn’t mean that I should have. I still love that truck—but looking back, my timing was poor.
From my perspective, the Lifestyle Creep is portrayed very well by Dan Aykroyd’s character in The Great Outdoors—Roman Craig. Roman makes a lot of cash. Roman spends more than he makes. Roman constantly overrides his brother-in-law, Chet Ripley, in the movie played by the late John Candy by buying lobsters instead of hotdogs and renting a Jetboat instead of the more conservative Pontoon. In the end you find out that Roman is broke and Chet, the conservative one, bails him out and uses his savings to get Roman back on his feet.
Now, don’t take this lesson I’ve learned and hole up in your homes and become shut-ins.
You need to treat yourself from time to time—but do so wisely.
I made a quick decision in my youth and I have learned from it. I cannot say that I’ll never let Roman Craig creep back into my life, but I’ll certainly kick him out a few times until I can properly afford his presence.
Frequently, the newly affluent are the most susceptible. As people establish themselves as doctors and lawyers, executives, and successful entrepreneurs, they see living well as a reward. Outstanding education, home, and business loans may not alter this viewpoint. Lifestyle creep can happen to successful individuals of any age. How do you guard against it?
Keep one financial principle in mind: spend less than you make. If you get a promotion, if your business takes off, if you make partner, the additional income you receive can go toward your retirement savings, your investment accounts, or your debts.
See a promotion, a bonus, or a raise as an opportunity to save more. Do you have a household budget? Then the amount of saving that the extra income comfortably permits will be clear. Even if you do not closely track your expenses, you can probably still save (and invest) to a greater degree without imperiling your current lifestyle.
Avoid taking on new fixed expenses that may not lead to positive outcomes. Shouldering a fixed mortgage payment as a condition of home ownership? Good potential outcome. Assuming an auto loan so you can drive a luxury SUV? Maybe not such a good idea. While the home may appreciate, the SUV will almost certainly not.
Resist the temptation to rent a fancier apartment or home. Few things scream “lifestyle creep” like higher rent does. A pricier apartment may convey an impressive image to your friends and associates, but it will not make you wealthier.
Keep the big goals in mind and fight off distractions. When you earn more, it is easy to act on your wants and buy things impulsively. Your typical day starts costing you more money.
To prevent this subtle, daily lifestyle creep, live your days the same way you always have – with the same kind of financial mindfulness. Watch out for new daily costs inspired by wants rather than needs.
Live well, but not extravagantly. After years of law school or time toiling at start-ups, getting hired by the right firm and making that career leap can be exhilarating – but it should not be a gateway to runaway debt. According to the Federal Reserve’s latest Survey of Consumer Finances, the average American head of household aged 35-44 carries slightly more than $100,000 of non-housing debt. This is one area of life where you want to be below average.1
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Securities offered through LPL Financial, Member FINRA & SIPC. Investment advice offered through IFG Advisory, LLC, a registered investment advisor. IFG Advisory, LLC and Magnolia Financial Group are separate entities from LPL Financial.
Citations.
1 - time.com/money/5233033/average-debt-every-age/ [4/13/18]