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Financial Education

What is Lifestyle Creep?

Learn how to spot the gradual signs that you're headed toward living beyond your means.

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You read in the news that another celebrity has filed for bankruptcy, and can’t help but wonder, “How can that happen? How can someone who makes so much money be short on cash?”

Meet “lifestyle creep,” sometimes called “lifestyle inflation.”

What is lifestyle creep?

Lifestyle creep occurs when a person’s income increases, and as a result, money is spent more freely on nonessential and luxury items. This can be as a reward for hard work, or to fulfill the need to meet perceived expectations (by friends, family, colleagues, society, etc.). It can also happen without being aware more money is being spent. Pretty soon, nonessentials don’t seem like luxuries anymore; rather, they are construed as necessities. (It’s called lifestyle “creep” because it happens gradually. You don’t have to be a multimillionaire—or even wealthy—for it to set in.)

Living above your means can be dangerous for a number of reasons: It can be difficult to give up a new lifestyle when a financial downturn occurs, or an unexpected emergency arises. And certain purchases (like homes) aren’t so easy to unload even if needed. With no money in savings, more and more everyday expenses deemed “necessities,” before you know it, no matter how much money you’re taking in, you can find yourself in debt.

Are you falling into lifestyle creep?

Let’s look at a young couple who has been getting steady promotions and raises. They’ve been gradually improving their lifestyle, and the changes are so small they don’t even notice. Before they even realize it’s happened, their monthly financial obligations have grown, and their savings have dwindled. They’ve put little toward retirement because it seems far away.

Young people can become susceptible to Lifestyle Creep when they get their first well-paying jobs or early promotions. They may not yet be dealing with a mortgage or kids, and may feel like they have a lot of discretionary income. It can also take hold as people get older, especially when their kids are grown and their home is paid off.

How to avoid lifestyle creep.

Lifestyle creep doesn’t have to happen. It just takes a little planning and resolve to keep track of your money and where it’s going. Here are some strategies to help you stick to good savings habits, and avoid the creep:

1. Develop a Budget:

Do you know how much money you’re bringing home and where it’s going? The best way to do that is by creating a budget. A budget allows you to see exactly where you can cut spending, where you can increase saving, and what changes you can make to realize your financial goals: having an emergency fund, buying a home, retiring comfortably, or even better: all of the above.

2. Automate Your Savings:

Putting money into your savings account may be the most important part of your budget. However, if you transfer it manually, you may forget or avoid doing it because you’ve over-spent in other areas. Set up recurring transfers from your checking to your savings account through online banking. Designate a day (preferably soon after you get paid) and a pre-determined amount, and let technology do the rest. Or, even better, set up direct deposit to automatically transfer your money into your designated accounts. That way, you’ll always hit your savings goals every month.

3. Spend Intentionally:

Give some thought to what you spend your money on. Impulse buying is all too easy these days. A couple of clicks can put a tennis racket—or a new sofa—in a virtual shopping cart (and straight to the doorstep in a couple of days). A good way to look at the real cost of something is to look at an item’s “cost-per-use.” This can be applied to everything from a new pair of shoes to a new HDTV. Another strategy for couples is to adopt a “Living Single” mindset and create a budget based on one income.

4. Increase your retirement savings as your income grows:

If you’re having a percentage of your income invested in an employer-sponsored retirement plan like a 401(k), increase that percentage with each raise. How much? That depends largely on your age and the number of years you have until you plan to retire. One popular strategy advised by experts when you get a raise is to double the number of years until your expected retirement. That’s the amount of your raise to keep. The rest should go straight in to your employer-sponsored retirement plan or individual retirement account (IRA). For example, if you’re 45 and expect to retire in 20 years, you would keep 40% of your raise and put the remaining 60% in your retirement plan. There are a lot of retirement calculators available. AARP has a good one.

5. Choose the right savings account(s) for your goals:

Make sure your savings account is working for you. Know how much interest you will earn, what types of fees may be charged, and how you can access your money. Consider a term account for long-term goals. And don’t be afraid to open multiple savings accounts, for multiple savings goals, which can be a great savings motivator.

Lifestyle creep doesn’t just happen when you get a raise. It can occur whenever you come into unexpected money: an inheritance, a tax refund, an investment that pays off big, even a lottery win. But by prioritizing saving and sticking to a budget, you can help make your money last through good times and bad and have enough for the things for which you’ve intentionally planned.

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CUNA 2023 diamond award trophy icon

CUNA 2023 Diamond Award Winner

Financial Education

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