Lifestyle Creep: Are You Spending More as Your Income Grows?

Many people find that as their income increases, so does their spending. It can happen gradually, making it hard to pinpoint. With a recent survey showing that almost 50% of people who earn $100,000 or more annually live paycheck to paycheck,¹ lifestyle creep could be a contributing factor.

What is It?

Lifestyle creep, or lifestyle inflation, refers to the gradual increase in your standard of living as your discretionary income rises. It’s common for someone to feel comfortable spending more on non-essential items such as a newer car, larger home or extravagant vacations. While enjoying the benefits that come with a higher income is understandable, lifestyle creep can lead to financial strain if a person fails to maintain a balance between their expenses and savings.

How Does it Happen?

As you advance in your career and receive raises, bonuses or a higher-paying position, you now have more money to spend, save or invest. Sometimes your social circle can influence your spending habits. For example, if friends or colleagues have a high standard of living, there could be a desire to match their spending habits. Over time, what was once considered a luxury becomes an affordable expense.

What Can You Do About It?

Create a Budget – Track your income and expenses to see where your money is going. A budget can help you identify areas where you may be overspending. It can also give you an accurate snapshot of your income and expenses to highlight where you could adjust savings allocations, investment choices and debt payments. The goal is to end the year or, perhaps, each month with positive cash flow—a key to achieving your short- and long-term goals.

Understand your financial goals – Having short- and long-term financial goals encourages consistent savings habits. Knowing that you are working toward important objectives such as saving for a down payment on a home or a child’s college tuition can make it easier to prioritize saving over spending and help you make informed and deliberate decisions.

Pay your “future self” first – Setting up an automatic transfer from your checking to savings or investment account per pay period is one of the best ways to “pay yourself first.” Automatic deposits make sticking to a budget easier.

Build an emergency fund – Life can be unpredictable with unplanned events arising when we least expect it. Building up an emergency fund over time provides that extra layer of comfort and protection. Consider setting aside 3-6 months’ worth of expenses to give you a financial cushion so you can be prepared for the unexpected.

Implementing these strategies can help you enjoy the benefits that come along with a higher income without falling victim to lifestyle creep. Speak with a Jemma Financial Advisor to discuss savings strategies and investment plans that enable you to build wealth over time.

1. PYMNTS, April 2024