Lifestyle creep is simply using income increases to finance a more lavish lifestyle. It’s natural to want to enjoy increases in your income, but some discipline here can reap large rewards down the road. Some advisors advocate saving all of your future increases since you’ve gotten along without them so far. This approach neglects the effects of inflation on maintaining your current lifestyle. It also denies you the ability to enjoy life now rather than saving all increases for an uncertain future.
My advice to clients is to enjoy life now and to prepare for the future. Circumstances vary at different points in our lives, so there’s no hard-and-fast rule for everyone. For example, a 20-something just out of college has different spending needs than a 50-something who’s paying for their kids’ college and also saving for retirement. No matter what your situation is, putting all of your new eggs in either basket is a warning signal. A good starting point for thinking about this balance is to enjoy about 25% of your new take-home pay and to save the rest. (If your increase is large, this might seem like a large amount to save. However, don’t forget all of the things you may want to save for: an emergency fund, paying down credit card debt, a down payment on a house, college for your kids and so on.)
What are some of the things that might tempt us to spend more than 25% of our increase now rather than salting it away for future uses? We might want a nicer apartment or home (size, location, etc.). We might want a new car. We might want to eat out more often. There are numerous temptations. That’s why the 25/75 guideline is so useful. It can help us prioritize our current desires (and generally these are truly just desires rather than actual needs). It may help you figure out the most satisfying way to spend the 25% portion of your increase by setting up an actual budget for these funds.
As you can see, getting the spend-now-versus-save-for-later balance right varies based on where we are in life and our personal circumstances. We’d be happy discuss the best way to use your increase in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.