Lifestyle Creep: The Destroyer of Savings

Lifestyle Creep: The Destroyer of Savings

If there is one word that is dominating the markets currently, it’s inflation. Right now, Americans regard rising inflation as our country’s biggest problem and finding ways to lasso this money eater into submission is a notable talking point for investment managers like Mottet Wealth.

Rising inflation at a national level – and across the world – is a big deal because it eats away at disposable income. Yet there is another type of inflation that is just as insidious, but doesn’t make the news headlines: Lifestyle creep.

Also known as lifestyle inflation, lifestyle creep kicks in when discretionary income rises and, inspired by the extra cash in our pockets, our spending habits change. Our expenses increase as we start to view nice-to-haves as essentials, be it extra meals out, luxury goods, running a second car or investing in a holiday home.

All of a sudden, we find our excess income after tax, basic living costs and investments dwindling as we continue to spend unchecked and without regard for our budgets and long-term savings goals.

The Destroyer of Savings

There is an old saying that ‘as in nature, politics abhors a vacuum’. Something, or someone, will have to fill the hole. Managing your money is no different.

When more money is flowing into your account, it will want somewhere to go. The easy way out is to spend on all the luxuries that make you feel good – after all, you’ve earned it. Right? The harder way is to stick to a plan that recognizes how the consequences of your spending habits today have a direct impact on the comfort of your life in the future.

Lifestyle Creep and Retirement

The challenge of allowing yourself to get caught up in lifestyle creep is that you’ll constantly be chasing the next promotion or raise to feed your growing standard of living. That’s all very well when you are earning and at the top of your profession, but what happens when you hit retirement age and the expectation is that you’ll maintain this lifestyle on a set income?

For most Americans, failing to save adequately for retirement is one of their biggest financial regrets. After all, the more time you give your retirement nest egg to grow the more compound interest kicks in and the bigger the eventual pot. But if you splurge on lattes and lunches, chances are that your retirement savings will suffer.

If you can’t quite see how all these little extras add up, then ask your financial advisor to go through the following exercise: Work out your current expenses and the rate at which you are spending more each year, taking into account cost of living increases.

Now, do the math about how much more you need to save to continue to live at this level after you retire. Then, add up how much you’ve squandered over the year, rather than topping up your discretionary savings and emergency fund. You may have to sit down first.

Lasso In Your Lifestyle Inflation

Impulse spending is the fuel that feeds lifestyle creep. So, the simplest and most effective way to keep a handle on this type of personal inflation is to have a financial plan and a realistic budget. Then you need to stick to both.

If you don’t have a financial plan, then I encourage you to give me a call so we can work together to find the ideal balance between ensuring your future financial health while advocating for better living both now and during your golden years.

When crafting your unique financial plan there are some key points to consider, which I highly recommend you consider before meeting with a professional:

  • Use increases wisely – Instead of putting the entirety of a raise into the pot for spending, rather allocate 75% of the higher figure towards your long-term retirement savings goals, to paying off debt or invest in the stock market. The rest can be your reward; but only 25%!
  • Don’t overspend on your home – One of the first luxury expenses that people tend to make as they climb the corporate ladder is a bigger and better house or apartment. This is often not a need-based move, but an ego-driven decision that traps you into ever-higher monthly expenses. A luxury car is another such trap, as are designer clothes and frequent exotic holidays. However, if you take the time to budget and allocate how much you are comfortable spending on housing – maybe 20-25% of net income – then this will help to rein you from overcommitting to long-term purchases.
  • Keep monthly expenses down – Another way to ensure that your day-to-day expenses don’t get out of hand is by regularly auditing where your money goes. Keep a list of monthly expenses, as well as memberships and subscriptions. If you aren’t using them, or they aren’t adding value, then cancel and allocate the funds elsewhere.
  • Prioritize saving to curb impulse spending – There are some nifty automated bill-payment apps and software programs out there which you can harness to ensure that your bills are always a priority and that you get reminders ahead of time. Some names to consider include Prism, Quicken and MyCheckFree.
  • Focus on long-term goals – If you allow a daily $25 lunch habit to get out of control, it can soon balloon out of control. Similarly, feeding your fancy for designer handbags or suits will eat away at your income. By focusing long term, on big ticket items and tangible dreams like a comfortable retirement or holidays and experiences that you will remember forever, you can halt this instant gratification by refocusing your attention.
  • Be mindful about your financial choices – Here a budget can really be a lifeline when the allure of ‘stuff’ gets too much. If you learn to make mindful choices about spending – decisions that take into account your big picture thinking – then it’s easier to catch yourself when you falter and get back on track quickly.

Bring In Back-Up

A good investment manager can also play the indispensable role of a Jiminy Cricket, by whispering in your ear when your spending gets out of control and acting as your financial conscience. Just the sort of guide you need to keep lifestyle creep in check. As a fee-only investment advisor, you can be 100% confident that my advice places you at the center. Please get in touch if you have any questions and I’ll be happy to help.

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