One of the keys to saving successfully for the future is putting our extra cash where it
can do the most good. Unfortunately, the natural tendency when we receive a raise is
to spend it. It’s easy to allow your lifestyle to creep beyond your needs or even beyond
your means. This phenomenon is called lifestyle creep.
When we get a raise, most of us end up upgrading our lives in little ways. We get the
better cable package or cell phone plan. Maybe we upgrade our car, hire a weekly
housecleaning service, or take nicer vacations. This can be detrimental to your
financial future.
Consider these tips to counteract the tendency toward lifestyle creep:
Drop one luxury from your life and put the money toward your 401(k). Is that
magazine subscription really worth it, or are you three issues behind because
you won’t make the time to read?
Track your expenses. There are many ways to do this. You can use your debit
card for everything and use your bank’s online tools to see where your money is
going. There are also several websites, such as Mint.com, that perform a similar
function. You can also resort to limiting yourself to paying with cash. Find a
system that works for you.
Are you getting good value for your money? Is the $200 spent each month
on restaurant meals worth it? Is the $150 per month for fancy coffee
worth it? Find a few expenses that don’t contribute to whatever is
important to you. Save that money!
Track your savings. In a similar fashion, keep track of every dollar you save.
How are you doing? Congratulate yourself when you see progress. Imagine how
much you’ll enjoy your retirement down the road.
Create a budget. Armed with your expenses and savings numbers, create a
sensible budget that you can follow. Revisit the budget each month and
determine if it still makes sense.
Compare your lifestyle and expenses to a year ago. Then do the same, only go
back five years this time. How have things changed? Are the upgrades to your
life worth the expense? How would your life look in 10, 20, or even 30 years from
now if you saved that money instead?
Make a list of how lifestyle creep will affect you in the long-term. It’s easy to
view life with a short-term mindset. But that leads to making decisions that are
beneficial in the short-term. These decisions are often poor in the long-term.
Make a list of the negative things that could happen if you don’t cut back
and save more aggressively.
Make a list of your debts. Put them all down on paper so you can view them all
at once. Are you utilizing your income wisely? Would some of the money you’re
spending be better spent on reducing your debts? How will your future be
affected?
Intelligently apply the money you’ve recaptured. Ideally, any available funds
will be spent on debt or savings. If you’re applying money toward your debt,
start with the highest interest debt. If you’re saving money, ensure you’re
putting it in the best possible place.
Lifestyle creep can be challenging to recognize.
A brand new bass boat in the driveway is easy to spot, but going out to dinner a few
more times each month is less obvious. Lifestyle creep can create challenging financial
circumstances in the future. Make an effort to apply any additional income toward
debt or savings. You’ll be grateful down the road.
