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Become Financially Independent Sooner: Avoid Lifestyle Creep

Here's a common story that you've probably heard before. Imagine a couple living a comfortable lifestyle. When one of them gets a huge promotion things started to change. They sold their house and move into a bigger house. They bought a cabin on a lake. They started buying more expensive cars and started sending their kids to private schools.

There is nothing wrong with any of their purchases, and their new lifestyle is well within their means. Even so, they are victims of lifestyle creep.

lifestyle creep

Income - Costs = Savings

We all have a lifestyle that we feel comfortable living. Once our incomes have risen above the level necessary to support our desired lifestyle, we don't need much more to support what we consider a good life. Anything over and above that is just luxuries. Our lifestyle has a cost, and whatever income we have over that can be saved, and savings help us reach financial independence as soon as possible.

When we increase our lifestyle, we increase our costs. Increasing our costs reduces our savings. And, reducing our savings pushes out the time it takes be become financial independent.

(Apology...sorry to get all mathy on you!)

Lifestyle Creep

Bonuses, raises, or other financial windfalls have a tendency to nudge us into a more expensive lifestyle. And as you saw with the math demonstration (sorry again...), any increase in costs reduces what could have been savings.

I can hear what you're thinking; you are thinking that even if you choose to spend more you can still save more, too. If you make $10,000 more per year and your lifestyle cost increases by $8,000, you are still saving $2,000 more than you otherwise were.

That's true! It's also not the point I'm trying to make. Lifestyle creep is exactly what was just described. The justification that "I can afford to spend more now." The point is that by succumbing to lifestyle creep prevents you from saving as much as you otherwise could have, and the upside is a lifestyle that isn't necessary - just luxuries.

Consequences of Lifestyle Creep

By spending raises on a more expensive lifestyle instead of increasing your savings you take longer to accumulate enough money to claim financial independence. Further, your new lifestyle costs more than before, meaning that when you retire you'll have to withdraw even more from your savings that you otherwise would have.

I'll say that again, lifestyle creep means that you need to withdraw more money from a bucket that has less money than it could have.

Fighting Lifestyle Creep

How can to fight lifestyle creep? Start by picking a lifestyle you are comfortable with, and save the rest. For most of us this is not as easy as it sounds. Ignoring what the proverbial Jones' do can take a lot of will power. It will take some training to ignore what your friends and neighbors are doing. Remember, they are probably not rich; they just want you to think they are. Aligning your use of money with what's important to you will help.

Another way to fight the will power draining is to automate your savings as much as you can. The more decisions you automate, the fewer decisions you have to make. If the money gets transferred before it hits your checking account, then you won't even miss it. Instead it will be sitting in your investment account helping you become financially independent.

Desired Lifestyle

The concept of your desired lifestyle is important. I'm talking to those of you who can afford to live a more expensive lifestyle, but instead of choosing not to. I am not talking to those of you who can't afford a comfortable lifestyle. To you my advice is to keep investing in yourself and earn more income until you get to your desired lifestyle, then save your raises after that.

Remember with financial independence and freedom comes flexibility and options. You don't want to be dependent on anyone, so take steps to make it happen.

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© 2018 Money Health Solutions, LLC



About the Author

Derek Hagen, CFA, CFP, FBS, CFT-I, CIPM is a speaker, writer, and coach specializing in financial psychology, meaning and valued living, resilience, and mindfulness.


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