PERSONAL FINANCE gurus and bloggers will tell you that lifestyle creep—the tendency for spending to rise along with income—is one of the greatest barriers to building wealth. While that’s sometimes true, I believe it can also be a source of joy and reward.
After all, while we might work hard to get a pay raise or earn a big year-end bonus, what a lot of people are really striving for is the ability to increase their spending. Consider a fistful of examples:
Almost everyone has a reason to increase spending as their income rises. Often, these reasons are rooted in the way we view money. What do we remember about money from childhood? What is our definition of money success? What purchases bring long-term joy to our lives?
Lifestyle creep doesn’t need to be a negative concept. Many of us want to work hard and earn more so we enjoy a better standard of living. That doesn’t sound negative to me.
Of course, lifestyle creep needs to be weighed against saving for the future. How do we find the right balance? I like the 50-30-20 method. The basic premise is to break down your spending into three buckets: 50% for needs, 30% for wants, and 20% for savings or paying down debt.
The reason this method works so well is that lifestyle creep is built right in. As your income climbs, regular savings increase, but so too does spending on your wants and needs. By making your budget based on percentages, you’re allowing for your standard of living to climb with your income.
The more people I talk to about money, the more I find that our views are uniquely individual to each of us. Money success means something different to you than it does to me. One person’s most important purchase is another person’s wasteful spending.
Sometimes, personal finance enthusiasts get caught up in what people should or shouldn’t spend money on. My advice: We should be far more focused on what success with money means to each of us. Figuring that out is the crucial first step to a good financial plan.
Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine his two favorite passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at Luke.Smith@Wealthspire.com. Check out Luke’s earlier articles.
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Thanks. I completely agree that saving and spending is uniquely personal. What may be right or one person may simply not work for someone else. Savings and spending allocations can be helpful, but should be tailored to specific circumstances, rather than a cut and dried formula. If you are a financial professional and have a pretty routine set of recommendations for your clients, you may want to rethink whether you are providing much value for the fees you are charging.
This really resonated with me. For so long now I’ve heard/read about the “latte” factor, needs vs wants. I get it. But the last several years hubby and I have finally gotten in a position where we can breathe a little easier. This is partly because of luck and partly hard work. We each inherited a little money from parents’ estates. I finally landed a decent paying job that I’ve been at for over 6 years now, and hubby was able to get back into government job and recoup benefits. A couple years ago we discussed it and decided to pull the trigger on upgrading his season tickets to his favorite sports team. So far, we have not regretted it for one single minute. Need, of course not. Want, definitely. Happier because of it, absolutely.
The problem with lifestyle creep is that if you avoid it you can just retire.
Let’s say you’re making $60K/year at your first software engineering job, and you’re spending $30K and saving $30K (50% savings rate).
You’re 17 years away from retirement, according to MMM.
When your pay increases to $100K, you keep saving 50%, so now you have an extra $20K to spend ($50K – $30K) each year. Awesome!
But if you don’t spend that money, and keep living off of $30K a year, you’d have a 70% savings rate.
With a 70% savings rate, you can retire in 8.5 years — nearly half the time! Yeah, lifestyle creep is actually awful, sorry Luke.
Many readers of Humble Dollar probably grew up in simpler times than today. Thank you for your article challenging some of the concepts many of us hold (as evidenced in this comment section).
However, with tongue-somewhat-in-cheek, would you consider changing your sentence “Almost everyone has a reason to increase spending as their income rises” to “Almost everyone has an excuse to increase spending as their income rises?”
I believe your wording absolutely applies to people whose current income does not meet their true needs, but the revision better describes the rest.
Having grown up as the older child of a 30 year-old widow, attending a Quaker college, and working 36 years for a penny-pinching public utility, I have had “the simple life” drummed into me. This background makes me overly conscious of whether spending is driven by wants versus needs. (My wife considers this a curse.)
Luke, thanks for reminding us that we are not trapped in the money lessons we learned from our family of origin. My mom had very strict rules about what we could order at restaurants – for instance, onion rings were forbidden as “bad value’ – and part of growing as a financially mature adult is getting new perspective. Discretionary dollars, based on your life stage and location, should be spent on things you enjoy. The challenge is to do the work to figure out what’s enjoyment for you and not some consumer dream or what your dad wanted or or or….
Doesn’t this theory or goal depend a lot on the level of income and stage of life for it to make sense? I’m thinking in terms of me, once the single corporate trainee as compared to me now, the married retired grandpa.
I agree. It’s a lot easier to save 20% if you earn $150,000 rather than $50,000. Spending 30% on wants is not something I can understand. It must be a generational thing.
@RQuinn – Why not 30% on wants? I think it depends on what it’s 30% of. Now that we’re retired and living off our savings, we really only have two buckets: fixed and discretionary. As it turns out, our annual spending falls right into a 70/30 split between those two. 70% keeps the roof over our head, the lights on, the cell phone and internet paid, and food on the table. 30% goes to recreation, vacations, and eating out.
Are those “wants”? I don’t know – to me, they’re discretionary. We enjoy doing them, and we know we can cut them back as needed without having to uproot ourselves or otherwise, compromise our basic living situation.
This threw me, but I immediately thought someone else would have already commented, so I’m surprised no one has, unless I missed it.
“The basic premise is to break down your spending into three buckets: 50% for needs, 30% for wants, and 20% for savings or paying down debt.”
I’m stunned to see “savings or paying down debt” as one category.
As to the 20% number, if it’s savings, great. If it’s paying down debt (with some exceptions) then the 30% for wants needs to shrink and debt servicing needs to grow.
If you can manage to save and invest 20% of your gross income, the rest will take care of itself.
Who wants to work for 37 years until retirement with a 20% savings rate? That doesn’t sound great to me.
A good article and I agree with your premise. After all, what’s good money if we don’t use it to make ourselves happy? Of course, we all probably agree that there’s thoughtful purchases that can add to our happiness (regardless of what others may think of them) and thoughtless purchases that simply spend money without a corresponding increase in our happiness. As you outlined, the trick is to be disciplined and organized enough to accomplish this within the constraints of what we can afford.
There is a big difference in our ages and our point of view about money. I’ve faced most of those issues you mention and found a way to achieve them or similar ones during my 79 years without getting to the point of rationalizing higher spending.
That’s the danger I see in your approach. It seems perfectly reasonable with little things, but so easy to talk yourself into new definitions of needs. I think we also need to make a distinction between one time cost purchases and committing to an ongoing expenses like a house because one needs four bathrooms or walking in closets to hold 75 pairs of shoes.
In the old days our needs seem to have been far more modest – I grew up in a one bathroom two bedroom apartment with a family of five.
For many people the temptation to spend is very strong and easy to justify, even the temptation to manipulate those buckets.
If you are a reader of HumbleDollar, you have heard my philosophy probably too much. Save (automatically) 10 to 15% of gross income, never carry a credit card balance and then spend whatever you like. I’d also suggest adding to the saving percentage with a growing portion of income.
Yes everyone deserves to be able to improve their lives as their income grows, but defining needs is the absolute priority IMO.
To be honest, Dick, I don’t think what you say contradicts what Luke is saying. You write, “Everyone deserves to be able to improve their lives as their income grows.” That’s exactly what Luke is saying, even as he also advocates that folks increase the sum they save as their income rises. In recommending the 50-30-20 method, he says, “As your income climbs, regular savings increase, but so too does spending on your wants and needs.” Sounds to me like an admirable, balanced approach to managing money.
It’s all in the discipline and definitions people use I guess. I just think without doing without credit card debt the 30% on wants is easily out of control.
If it stays at 30% how is it out of control, even if it is 30% of a bigger base after a raise?
You’re right it can’t as long as spending means paying cash and not carrying and accumulated debt. I just think assuming 30% is available for wants is risky business.
Mr. Quinn – When you bought your Cape vacation house, was that a want or a need?
Definitely a want, no question, but to do it I rented it for ten years leveraging all the tax benefits and it was an investment although not the objective. But still not a necessity.
As I said, nothing wrong with improving one’s life as income grows, I just think to the tune of 30% of income on wants is a bit unrealistic for most people and I also think given the actual savings rate, 20% while desirable, is unrealistic for most Americans.
IMO, the last thing we need is to encourage people to spend money on their wants. They are pretty good at it already.
But hey, I know I’m the outlier in all this, but it reflects my life experience.