Is “lifestyle creep” Threatening Your Financial Future?
By Ziyah Esbenshade, CFP®, APMA®, CRPC®
As your income increases, your spending habits may have a tendency to go up as well. This is a phenomenon known as lifestyle creep. Though it’s a natural inclination to want to spend more as your funds go up, it’s important that it doesn’t impede your ability to protect your long-term financial security. If you’re making more money, but your expenses are noticeably higher than they were before, or your savings seem stuck in neutral, it may be time to reset your spending habits. Here are three steps to help you avoid or reverse lifestyle creep
Step #1 – Assess your current spending patterns
One way to identify whether lifestyle creep is a reality for you is to compare your expenses and savings strategies to a point in the past – say one or five years ago. Review checking account statements from then compared to those of today. You should be able to detect whether, in that time, your spending has changed significantly. Also, review how much you are putting away in savings – your bank accounts for emergency needs, your retirement accounts, and toward any other savings goals. Has that number improved or declined in the past year? This can tell you a lot about whether lifestyle creep is threatening your future goals.
Step #2 – Establish a “target” budget and stick with it
Creating a monthly budget provides you with guideposts on how much you should spend. It also helps you prioritize what’s important. Lifestyle creep often occurs when we become too fast and loose with our money, spend impulsively, or simply get careless about spending. Budgeting can help you put parameters around what is justifiable spending and what expenses will most likely prove unfulfilling.
Step #3 – Increase savings where possible
One primary reason to investigate the potential for lifestyle creep is to determine ways to enhance your savings strategy. If you are employed and can participate in an employer’s retirement plan, be sure to do so. If the employer offers matching contributions, it’s important to fully capitalize on it. An ideal target is to set aside at least 10% of your gross income in retirement savings. That can include a Roth IRA, where you can build a source of retirement income that can qualify for tax-free withdrawals. Also, be sure to boost your savings when you receive a raise or, at least, to keep pace with inflation.
Having a financial plan in place is a good way to put the damper on lifestyle creep. An up-to-date plan can help you establish a savings regimen that will keep current spending in check and keep your long-term goals on track. Your financial advisor can help.
Ziyah Esbenshade, CFP®, APMA®, CRPC®, is a Private Wealth Advisor and Senior Vice President with Pell Wealth Partners, private wealth advisory practice of Ameriprise Financial Services, LLC in Rye Brook, New York. She specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact her, visit pellwealthpartners.com, call 914.253.8800 or visit our office at 800 Westchester Avenue, Suite 300, Rye Brook, New York 10573.