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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.