I know plenty of broke doctors.
A broke doctor? That has to be an oxymoron, right?
Unfortunately, many high income earners barely scrape by. Sure, they may earn a lot of money and look rich, but that doesn’t mean they’ve built any degree of wealth or financial freedom. Truth be told, they’re often stuck in the same financial trap as most people, but on a larger scale. Despite having a large paycheck, they too are overspending and taking on enormous amounts of debt!
Lifestyle creep affects everyone, regardless of pay and some people don’t realize it exists. But, it does and it will continue to hold you back from living the life of your dreams unless you get it under control!
Once you understand it and where it comes from, you will be able to beat it. The result, a giant leap forward towards your financial goals!
It prohibits you from maximizing your savings, building wealth, and living your dreams.
Lifestyle creep (also lifestyle inflation) is the increase in your spending habits as your income grows. It’s the number one reason that most people continue to be stuck in debt. Despite the fact they are making more money.
It’s tied to changes in income. Lifestyle creep occurs when income increases from bonuses, pay raises, and promotions. People have more disposable income than they did before. And decide to reward themselves for an achievement.
When most people get a raise, they celebrate their accomplishments. For some, this could be a nice dinner out with family, but more often than not it’s a big purchase.
Many people fall into the routine of using extra money to buy a new toy. Like a boat, RV, or motorcycle. And these often come with a large monthly payment.
The new debt can be equal to or even larger than the raise they received! The decision to acquire more monthly liabilities handcuffs the earner with more payments. And ultimately they’re unable to get ahead.
Also, most toys get used for a few months. And then they begin to sit. After a few years of sitting, it’s time to sell. And in the end, it’s for a big loss.
These buying decisions continue to push people further away from their goals!
Lifestyle inflation also happens to those who try to keep up with the Joneses. This phenomenon occurs when people buy things because their peers (personal and professional) have them.
I have seen countless individuals buy new cars because their friends had done the same. First off, there wasn’t anything wrong with the original one they owned. It worked well. And even got them from Point A to Point B. Now the new one gets them from A to B, but comes with a large monthly payment!
Work colleagues fall into this trap too. Imagine you just received a big promotion and raise at your job. You are no longer a corporate peasant, you are a manager!
All the managers dress a certain way, drive a luxury car, and live in the nicer areas of town. And now you feel you deserve to as well. But, just 5 minutes ago you had no problem surviving without these things. Now you NEED them. You begin to believe these items are essential to your new identity and ego.
Don’t fall into the trap of keeping up with the Joneses. Just because someone else bought something doesn’t mean it’s right for you. Don’t you remember your mother asking, “If everyone else jumped off a bridge, would you jump too?”
Also, you don’t know the Jones’s financial situation. More than likely they are like everyone else. They spend carelessly and try to portray their lifestyle in a certain way to the world. When in reality they don’t have a budget, struggle to make ends meet, and are in debt up to their eyeballs!
Most people aren’t on the same path as you, working towards their dreams!
Society believes that they work hard, make good money, and deserve nicer things. These feelings of entitlement also lead to lifestyle creep. It usually starts with “Treating Yourself” or “Rewarding Yourself” to a luxury item as a one-time event.
But, many people lack self-control and can’t stop once they start. Soon the former luxury good becomes a necessity. And the lifestyle creep cycle continues.
It’s important to reward yourself. Just be sure to have a plan when you do.
Raises, bonuses, and new jobs are exciting times in life! Take the time to celebrate your achievements and wins. Don’t skip them. These are important milestones, ones that you will look back on fondly.
The key is to celebrate within reason. I recommend spending 25% of your ‘new’ money on anything you enjoy. It doesn’t matter what it is, as long as it is important to you. And you don’t go into debt to get it.
That leaves a whopping 75% leftover, what should you do with it? On a personal finance site, paying down debt, investing, or putting it towards your goals are all acceptable answers!
Treat bonuses differently than raises. Bonuses are one time events and you should treat them as such. Use 25% of it on something that makes you happy, is memorable, or isn’t something you would normally buy. It could be a vacation, fancy dinner, or new surfboard.
Don’t forget about the remaining 75%! Apply it to debt, savings, or increasing your emergency fund.
A change in your income should prompt you to review your budget. You now have more money coming in every month and need to control where it goes.
Use 25% of your raise to increase your expenses. Be intentional with your spending and put it towards the items that are most important to you. And don’t forget about the remaining 75%. Use it to raise your monthly savings ratio.
Saving 75% of your ‘new’ money is an important step to boosting your savings rate. This is the percentage of money that you are saving in relation to the amount that you make. The higher your savings rate, the more money you are accumulating. Which in turn helps you to reach your financial goals that much more quickly!
An increase in income also makes it a great time to review your goals. Remember your ‘why.’ A large amount of money puts you that much closer to achieving a goal. Or even doing so early!
It’s human nature to want more. We all do. And lifestyle inflation is something we all experience to varying degrees.
Thanks to marketing, we have come to believe that buying more and spending more will result in greater joy. While this may be true to a small degree, it is often short-lived.
You don’t have to live your life this way. Spending to feel happy.
Instead, choose to focus on achieving your goals. They will be what you remember most, will bring you joy, and ultimately improve your life!
Lou Holtz said it best, “If you want to be happy for a day, go out and play golf. If you want to be happy for a week, take a cruise. If you want to be happy for a month, buy a new car. If you want to be happy for a year, win the lottery. But if you want to be happy for a lifetime, make sure you add value to everyone you come in contact with.”
How are you planning for lifestyle creep? Comment below.
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