Are You Showing the Signs of Lifestyle Creep?

Couple shopping for wine together
Getty Images
Lifestyle Creep. It doesn't sound like something you want in your life, but a lot of millennials have it. Unfortunately, it's not something you can buy a cream for. Lifestyle creep is a purely financial phenomenon and it's highly contagious. What's more, it typically flares up when your life is at its best.

Lifestyle creep is a simple idea. People who are used to living a frugal life by necessity often start earning more money as they progress in their careers. In other cases, they earn the same amount, but their regular expenses are reduced. In either case, there's an excess of income and many people aren't prepared for how to deal with it.

So what happens? People start splurging a little bit more. Items and experiences that used to be luxuries gradually become daily necessities. Life starts getting more exciting ... and more expensive. Traditionally, this phenomenon has been seen in older adults who are entering the prime of their career earnings, just a few years before retirement. They start living it up. But because retirement funds are supposed to be sufficient to sustain a lifestyle without other income, lifestyle creep has a way of creating a situation that's far too pricey for retirement.

These days, lifestyle creep isn't limited to oldsters. Millennials are showing all the signs. It all started back in the financial crisis of 2008, just when many millennials were coming of age. Jobs were in short supply, wages were stagnant and many young people thought they would never attain any kind of financial security. The situation hasn't changed for some, but many millennials are finally hitting their financial stride.

And they're spending a lot more in celebration. Millennials buy more clothes than other generations. They also spend more on electronics, cars, travel and other major purchases. This is often in response to newfound financial means. Maybe you can relate. Spending money is fun, but if your lifestyle is increasing faster than your savings and investments, you've got to take a closer look at what is happening.

Living beneath your means is the most important concept for fighting off lifestyle creep. Living beneath your means is all about living well, but not extravagantly. Now that you've gotten to a place in life where you have money for the first time, you've got to create a lifestyle budget that stays the same, no matter how much your income increases. Here are some specific things that you should be doing with extra money:
  1. Max out your IRA and 401(k). If you max out these tax protected investment accounts, you'll be very rich by the time you retire. If you don't, you're leaving money on the table. These investments will have more impact on your future than just about any luxury good you can name. Have a good time, but take full advantage of these opportunities if you possibly can.
  2. Take advantage of automatic savings opportunities. Your bank will be able to auto-draft money from your accounts in creative ways. Cloud-based budgeting solutions also typically offer this. Create ways to effortlessly skim off the top of your earnings. You'll save a lot of money this way, which can be spent on necessities, squirreled away or invested as described above.
  3. Budget, you slackard! If you don't know where your daily income is being spent, it's likely that it's being wasted. There are endless Web resources that facilitate accurate budgeting, but I use a plain ol' spreadsheet. Look at every dollar you bring in, then track where it goes. There will be some surprises if you observe your spending for a month. Figure out what you have available for daily needs, savings and investment -- and stick to it.
  4. Trim the fat. Once a month, take a quick glance at everything you pay regularly: insurance, entertainment, subscriptions, etc. Try to find a cheaper alternative, cancel something you no longer use or try to negotiate a better deal. This way, you'll constantly be finding ways to make your life work for less.
There are lots of other ways I use to keep lifestyle creep from creeping off with my money. Learning to cook my own food, selling my car in favor of a bicycle and buying a house whose mortgage was much lower than I used to spend on rent have all been helpful. These may work for you or they may not. The point is, you've got to be invested in the cost of your lifestyle. Keep an eye out for lifestyle creep, allocate extra money for sensible purposes, and you should be just fine.
Read Full Story