When you get a promotion or a big raise, that’s a reason to go out for a celebratory dinner and a couple of drinks. However, when your celebration continues and expands to include lots of purchases and possessions you once considered luxuries, most of that extra income could end up swirling down the financial drain known as “lifestyle creep.”
Lifestyle creep happens when you start earning more money, so you start playing fast and loose with discretionary spending. Pretty soon, all that extra money you’re earning gets eaten up by lifestyle upgrades that you couldn’t afford before. Lifestyle creep probably won’t happen all at once. Just as the name implies, spending more money just because you can creeps up on you – until one day you realize you’re just as broke as you once were, even with a higher income.
Meanwhile, you neglect important financial goals or milestones because all your money is going towards a better style of living you may not actually be able to afford.
Is your budget a victim of lifestyle creep? Here are four signs you may need to rein in discretionary spending and focus on saving for a better life later – and how to fix it.
1. You pay a lot more for rent or a mortgage
We all want a safe and comfortable home, so it makes sense to want to upgrade to a nicer apartment or bigger house when you get a significant bump in pay. However, it’s also easy to spend a chunk of those extra earnings on a place you can’t afford without cutting back on retirement fund contributions or deposits into emergency savings.
If you’ve been living frugally in a small apartment for years, moving to a two-bedroom apartment could be a great way to finally stretch out in a larger space with more amenities. But moving to a luxury apartment for double the rent you paid before could cancel out any leftover income from your raise.
If you can afford a better apartment or house now, consider upgrading to rent or a mortgage payment that leaves enough in your budget to save for financial milestones later. To make your higher income stretch, think about sticking it out for a while where you currently live. That way, you can save for a down payment on a house or pay off student loans with the extra earnings.
2. You’re suddenly a big spender
After years of splitting the bill at dinner, you might be eager to buy your friends meals, drinks and tickets to entertainment venues like sporting events and concerts. And now that you can finally afford to buy expensive gifts for family, friends and your main squeeze, it’s tempting to spend away on special occasions.
However, pulling out the credit card to show your love can run up a big balance before you know it. Then much of those extra earnings will go towards monthly credit card bills instead of savings. You don’t have to be a total cheapskate, though. You can still take a friend or two out to dinner occasionally. But keep your credit card balance in mind so you don’t end up scraping by because your monthly credit card payments exceed what you can afford.
3. You can barely afford your car payment
Who doesn’t love a nice ride? And now that you’re earning more, maybe it’s time to sell or trade in that old semi-reliable car for a new one with advanced safety features and other bells and whistles. But don’t get so excited by that new-car smell that you take on an auto loan that you can’t afford without eating rice and beans every day because that’s all you can afford.
Ideally, your car payment should be around 10 percent of your monthly take-home pay, according to personal finance site Nerdwallet. That way, you can hopefully keep total auto costs, including insurance, maintenance and repairs below 15 percent to 20 percent of your income.
To avoid lifestyle creep with a luxury car you can’t afford without being broke every month, take time to comparison shop.
4. You have high credit card debt
If you received a big raise, and you can’t pay off your credit card – or you’re making only the minimum payment each month – you’re living beyond your means. Meanwhile, you could be lowering your credit score if your credit utilization rate – the ratio of revolving debt to available credit – is too high. Ideally, your credit utilization rate should be no higher than 30 percent.
How to kick lifestyle creep out of your life
If you’ve opened the door to lifestyle creep, don’t be too hard on yourself. It’s easy to overspend when your income increases. Besides, you deserve a little luxury if you’ve had to be frugal in the past. But it’s also not too late to make adjustments that can free up more money in your budget each month so you can reap the benefits of a pay increase.
Assess where most of your money is going. If you went overboard on a more expensive apartment, find an affordable apartment that allows you to put money in emergency savings and a retirement account. If you’ve been going out to eat a lot, take your lunch to work a couple of days a week and pay closer attention to how much you spend for lunches and dinners. Then start hammering away at credit card debt so that’s one less drain on your paycheck.
Keep at it, and before you know it, the memory of lifestyle creep will be just one more valuable lesson on the road to meeting your financial goals.