Millennials and Gen Z, take note: good habits make for healthy finances. In college, you likely had a couple of friends who left on lavish trips EVERY spring break. Those trips don’t come cheap. According to Lending Tree, 1 in 5 student loan borrowers took out EXTRA student loans to afford a spring break trip. So, if the golden rule is to not spend what you can’t afford, why would so many student loan borrowers take out extra debt for vacations, on top of their 5-digit tuition?
They’re likely trying to keep up with a lifestyle of freedom, or pressure from friends with more affluent backgrounds. College is an exciting time when students find themselves with more disposable income from part-time jobs or excess funds from student loans and scholarships.
Sound familiar? It extends past college, too. Perhaps your hard work landed you a six-figure salary. You may have two schools of thought on how to handle it:
- Make smart investments and open a high-yield savings account.
- Get that new car, trade the apartment for a house in the suburbs, dine out every night, and take extended vacations.
The more you buy, the more you have to spend, and the more you own, the more maintenance you’re required to do. Suddenly, that six-figure salary doesn’t feel like a lot of money. That’s when you start to experience Lifestyle Creep.
Lifestyle Creep occurs when a person's expenses increase in proportion to their access to money. It can be immediate (ever seen those stories of lottery winners who spend it all?) or occur in small doses over time.
Not familiar with Lifestyle Creep? Let’s discuss.
The Cost of Lifestyle Creep
Lifestyle creep often reflects an increase in personal debt. As individuals start earning more, they may be tempted to upgrade their lifestyle by purchasing larger homes and better cars, visiting restaurants more often, or taking lavish vacations.
While these purchases may bring temporary satisfaction, the associated costs often pile up and lead to debt — especially if these purchases are made on credit. Without a proper financial plan, it gets more difficult to achieve long-term goals. While retirement and financial stability should be a priority, the temptation of short-term purchases creeps in with increased income.
How well-padded is your savings account? When impacted by lifestyle creep, you may find it harder to save for the future. For many, a personal finance plan includes retirement, saving for a child’s education, and, if you’re lucky, the ability to build generational wealth. A lack of savings from lavish expenses can leave individuals unable to fulfill these long-term goals — not to mention afford unexpected emergencies.
What does this mean? If your lifestyle expenses creep too close to your yearly income, you are losing your financial flexibility. As individuals commit to higher expenses, they may find it harder to adjust their spending, particularly if market forces cause their salary to decrease at any point in time. This lack of flexibility can create stress and anxiety, and nobody wants that.
Living BELOW Your Means… At Least For Now.
It’s a simple concept: when you’re starting, spend less than you earn and build solid savings. By living below your means, you can avoid the hidden costs of lifestyle creep and maintain your financial flexibility. By eliminating inflated spending, you can focus on building wealth and achieving your long-term financial goals.
However, that doesn’t mean that you can’t reward yourself for hard work. How much you’re able to splurge will vary from person to person. Some recommend that your yearly spending not exceed 50% of your income, but there are other factors like inflation and cost of living to consider as well.
Evaluate your spending habits and compare it to your yearly income. Does it feel unbalanced? If so, consider scaling back any lavish expenditures, knowing that by doing so, you’re setting yourself up for a more secure financial future that allows you to handle unexpected expenses and navigate the uncertainty of life without a tremendous impact on your finances.
Lifestyle creep can be a hidden threat to your financial well-being. When you come into a financial upswing, make sure to question the benefit of your expenses in the long term. By recognizing your impact and taking steps to live below your means, you can avoid the hidden costs of lifestyle creep and achieve long-term financial security and freedom.
If you’re unsure of how your decisions are impacting your finances. The LPSC Team is here for consultations. Connect with the team today!