Christopher Liew: Why lifestyle creep is hurting your savings more than you think

Money is removed from an ATM in Montreal, Monday, May 30, 2016. THE CANADIAN PRESS/Ryan Remiorz

Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.

Lifestyle creep is the quiet financial drain that occurs when rising income leads to rising expenses. Maybe you’ve landed a better job, your paycheque is bigger, and life feels more comfortable. Somehow, though, your savings haven’t grown, and you still feel somewhat “stuck.”

Understanding how this creep works and learning to keep it in check is the key to building lasting wealth and financial freedom. Otherwise, it will be very difficult to truly progress and achieve financial freedom.

Below, I’ll explain why it’s hurting your savings more than you think, and how to stop it before it snowballs.

The trap of lifestyle creep

For most of our young adult lives, we’re programmed to be consumers. What we consume varies from person to person. Some want the latest sneakers, tech, or designer clothes, while others have hobbies or crafts they pour their spare money into.

As adults, not much changes. Inevitably, we graduate from college or university and get our first decent-paying job, or our small business starts to make a little profit, or we progress in our careers and get all the bonuses and pay raises that come with the position.

With extra money in the bank comes the desire for a nicer apartment, more dinners out, an upgraded car, and spontaneous trips. All of these temptations, combined with the resources to do so, often result in your budget going out the window.

While these indulgences aren’t inherently bad in moderation, they often leave you without any extra room to save or invest the difference. Over time, this habit can stall your financial progress, keeping you trapped in a paycheque-to-paycheque cycle even as your finances improve.

As you fall victim to lifestyle creep, you may notice:

• you’re no longer saving enough for retirement;
• your emergency savings are dwindling;
• your investment portfolio isn’t much better than it was when you earned less money; and/or
• you feel increased pressure to make impulse purchases.

How to avoid lifestyle creep (and what to do instead)

Don’t get me wrong - I enjoy going out to a nice dinner now and then, being able to afford higher-quality clothes that last me longer, and being able to plan a periodic vacation to mentally relax and reset. However, all of these things are planned purchases that I work into my budget, so that I don’t forego my larger, long-term goal of financial freedom.

With that in mind, here are some ways that young professionals and entrepreneurs can avoid lifestyle creep and stay on track with their major financial goals, while still being able to enjoy life.

1. Automate your savings before you spend

First, you should start by treating your savings and investments like any other household bill - automatic and non-negotiable. Set up automatic transfers to your TFSA, RRSP, or high-interest savings account each payday.

By “paying yourself first,” you’ll be able to consistently save money without relying on willpower or whatever leftover cash you have at the end of the month.

2. Use your raises and bonuses strategically

As your income increases, it’s tempting to reward yourself with a lifestyle upgrade.

That $5,000 holiday bonus could easily pay for an exclusive trip to the Caribbean or help you make the down payment on a new luxury or sports car.

Instead, I encourage you to decide on a fixed ratio of each bonus to be diverted into savings or debt repayment. The rest, you can enjoy however you’d like.

For example, perhaps you decide to take 70 per cent of your bonus and put it towards paying down your credit card debt or invest in your TFSA, while using the remaining 30 per cent to buy something nice to reward yourself or fund a weekend vacation. This allows you to still celebrate your success while also leaving you with the confidence that you put your priorities first.

3. Resist impulse buying

Once you earn more money and start catching up on your credit cards, your credit score will increase, and you’ll be given higher credit limits, encouraging you to spend more.

This is where it’s very important to stay level-headed. Knowing that you can easily pay off the majority of impulse expenses you incur can lead you down the path of overspending

Housing, transportation, and dining are the biggest culprits behind lifestyle inflation. If your salary rises, resist the urge to immediately move to a pricier neighbourhood, trade up to a new car, or start eating out at fine-dining establishments. Keeping these anchor expenses fixed allows your disposable income to grow significantly over time.

4. Surround yourself with financially disciplined peers

One of the best ways to avoid lifestyle creep is to associate yourself with financially responsible peers. Simply put, if your friend group constantly asks you to come out and spend money or judges you by the monetary value of your clothes, car, home, or accessories, it will be very hard to not fall victim to lifestyle creep.

Instead, try to surround yourself with like-minded individuals who are not only successful in their careers or businesses but also responsible with their spending. While the difference may seem small at first, in 20 years the gap between those who were responsible with their earnings and those who were not will be enormous.

Final thoughts

While it’s not bad to upgrade your lifestyle a bit, make sure that you’re doing so responsibly. Plan your purchases ahead of time, resist impulsive buying, and don’t spend money for the sole reason of impressing others.

At the same time, make sure that as your income grows, you’re also continuing to increase contributions to your RRSP, TFSA, and other long-term investments.