In this article
Guys and Gals!
Hopefully, you’ve had a wonderful weekend and are ready to tackle this week’s goals.
I know I sure am.
For my first blog post this week, I wanted to share a conversation that had been weighing on my chest over the past several months.
Namely, I had this conversation with one of my fellow friends who is a marketing executive.
She’s extremely sweet, very intelligent, and has her goals set out before her. She’s going places in her career.
However, she might not be going places with her spending habits, if she doesn’t change them.
My friend is in her late 20’s and she earns about $7,000 per month (before taxes).
That’s not a bad income if you ask me.
Now, the common fallacy is that income = wealth.
As you may know, that’s not always the case (in fact, this is often rarely the case).
Why? It’s because a lot of people don’t know how to handle their money.
So, they go and do what’s “easiest” – which is spending the money.
Many of us have seen firsthand how people with relatively high monthly paychecks still live paycheck to paycheck.
…A whopping 78% of American workers have claimed they live paycheck to paycheck.
(According to a report on CareerBuilder)!
That’s just insane.
But this statistic explains why people – including my friend – may be earning a nice paycheck but don’t retain their paycheck because of lifestyle creep.
What is Lifestyle Creep?
Lifestyle creep = as your income increases (through promotions, job changes, bonuses, etc.), your lifestyle also tends to increase (or creep up) in relation to your paycheck.
And that’s exactly what happened to my friend.
As she started earning more money, she started buying things that cost more money.
Although she could have driven a $10,000 car (for which she could have paid for, clear and free) even as her income increased, she decided against this (wiser) choice.
Instead, as she saw more cash flow jump into her bank account, she decided it was time to purchase a Lexus. Worth about 5 times what her $10,000 car would have been. Ouch.
Since she didn’t have $50,000 sitting in a bank account, she financed the car.
Now she relies on her monthly paycheck to make monthly payments to the loan company so that she can drive a fancier car.
It could be many things.
Maybe it’s for status. Maybe it’s to show off. Maybe it’s to prove to herself that she “made it.” Or maybe, just maybe, a Lexus was her dream car since she was a young girl.
In that case, it’s understandable (but still a very expensive option).
However, regardless of what the reason behind her choice is, she now is dependent on her job to pay for the car, plus all her other lifestyle costs.
That’s lifestyle creep.
5 Ways Lifestyle Creep can Impact you Negatively:
Impact #1: Can make you live paycheck to paycheck
Ever heard of keeping up with the Joneses?
That’s essentially lifestyle creep. To conquer lifestyle creep, you need to learn how to not care what other people think of you and your financial status.
It certainly sounds harder than it is, don’t get me wrong.
But in the end, you need to consider this: will the others (the proverbial Joneses) actually care about my financial situation?
The very likely answer here is no, they won’t care.
So, why would you care what they think?
That should be the pivot point that hopefully will help you recognize that you do not need to wait for the approval of others.
You live your life – and if you are seeking financial independence or simply want to see your retirement accounts grow as you grow older, then filter out that “noise” and tune out the “naysayers.”
You keep your path and don’t look back.
Impact #2: Can prevent or lower your chances of retiring early
This should be a no-brainer.
As your income increases, your cost of living increases.
That’s not necessarily a good thing (actually, it’s almost never a good thing).
So, as you are increasing your lifestyle (buying nicer clothes, fancier cars, better vacations, etc.), you are – in one way or another – relying on that increased income of yours to pay for those luxuries.
In other words, you are becoming dependent on your income stream.
That’s one of the worst mistakes anyone can make. Why?
Because if you are dependent on one income stream, you generally won’t have the time to discover other ways to generate income streams.
(ie. You won’t have money left to invest in a rental property to create passive income streams, you won’t have money left to invest in an online course to further your education, etc.).
Instead of focusing your energy and money toward your emergency savings fund, retirement savings, investment accounts or paying off debt, lifestyle creep has you prolong debt.
(Buying fancy cars that you probably can’t afford) and reduce or eliminate your retirement savings because your money is focused elsewhere (maintaining a flashy lifestyle).
So, before you buy that next fancy purse or vacation – ask yourself this: do you really need it?
Would the money you would be spending for those items be better off saved or invested somewhere?
Recommended reading: 5 ways to save money on a tight budget
Impact #3: Can make you go into serious debt
Let’s imagine a worst-case scenario – what if you lost that job?
How would you be able to continue to live your fancy lifestyle without the income that you are relying on?
Let’s say you bought a fancy house, a nice car, and racked up some serious credit card debt – to the tune of about $10,000 because you went on an all-inclusive vacation. Oh boy.
Let’s say we are in a recession (which technically, we are) and it’s just taking you a long time to find a job that would pay roughly the same as your previous job.
(ie – a job that would allow you to continue your lifestyle).
It could take a few months – from submitting your application to being selected, and depending on the industry you want to go into, you may have 1, 2, or even 3 rounds of interviews before being accepted for the job position.
And then, of course, you may have to wait another few weeks before actually getting your first paycheck in your bank account.
How are you supposed to finance your fancy lifestyle for that “limbo” period?
The likely answer is debt financing.
Debt financing could mean through credit cards, through a line of credit on your home, or simply by applying to a private loan from your bank.
Either way, it’s not fun and certainly doesn’t help your financial picture.
If you had saved and contributed to an emergency savings fund – now would have been the right time to use those funds while you were in search of a new job so that you would have not gone into debt.
Recommended reading: How to eliminate credit card debt
Impact #4: Could impact your relationships
Think about who you are trying to impress with lifestyle creep.
Is it your best friend, your parents, your significant other or is it someone outside of your closest circle?
If it is someone outside of your closest network circle, then you may be developing a superficial relationship. Why?
If the people love you like they say they do – then they likely won’t care about the type of car you drive, the clothes you wear or the type of vacations you take.
Instead, they care about how you treat them and how you make them feel.
Assuming you want to impress people with a flashy new lifestyle, I would suggest to think twice whether these people really want the best for you – or do they just want to use you?
Chances are, the answer is the latter.
Recommended reading: 5 Financial turnoffs men find in women
The suggestion I would have in this case is to surround yourself with friends of the same mindset.
Throw away the toxic or superficial relationships.
They won’t bring you further in your career or life aspirations. They will hold you back. Don’t let that happen to you.
I know it’s so much harder to throw away toxic relationships, but it’s something that you will have to do one way or another if you want to win at life.
Identify who those “bad influencers” are in your life and develop a plan to eliminate them.
Your bank accounts and closest network will thank me later.
Impact #5: Could add more stress
Mental well being is so important in today’s already stressful and busy world.
Why would you want to add additional stress and anxiety to your life with lifestyle creep?
As we have explored in the previous 4 points, lifestyle creep will very likely reduce your contributions to retirement savings accounts, investment accounts, etc.
If there is a pop-up emergency, such as you losing your job, you may have to go into some serious debt in an effort to finance your current, flashy lifestyle.
I don’t know about you, but going into debt keeps me awake at night.
My mind goes into overdrive, and I am one stressed-out person.
Don’t do that to yourself.
I’m sure you’ve read somewhere how stress negatively impacts your body’s well-being.
So, for the sake of your sanity, try to reduce that lifestyle creep or stay away from it altogether.
Is it ok to improve your lifestyle as you receive pay increases?
Of course, it is – and you should reward yourself for your hard work and dedication to your job, your career, etc. I’m not saying you shouldn’t.
But I’m also not saying you should start spending every penny (or at least close to every penny) that you earn as you receive your promotions, bonuses, etc.
One good strategy is paying yourself first.
That means every time you see your paycheck in your bank account, contribute (ideally the maximum amount) toward your retirement account and then spend what’s left on yourself.
Another piece of advice I would whole-heartedly warn you against is this:
Beware of spending too much money on items you really can’t pay for out of pocket (such as a $50,000 luxury car on an $84,000 salary.
Be mindful of your spending habits as your salary increases.
Your bank accounts will thank me later!
Have you ever experienced lifestyle creep?