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How to deal with lifestyle creep

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By Capital Partners Lifestyle

If you’re out for a walk on a gradually sloping path, you might not notice the incline until your breathing becomes heavier and your legs start to strain. It’s only when you look back and see the height you’ve gained do you realize the climb you’ve been on.

This is akin to the phenomenon of ‘lifestyle creep’ in personal finance.

Deciphering lifestyle creep

As we progress in our careers, most of us tend to see an annual increment in our salaries. Without a strategic plan to save that increment, it effortlessly translates into spending on new luxuries.

It starts with seemingly harmless upgrades: opting for the exclusive streaming service, selecting top-shelf spirits, indulging in the latest gadgets, splurging on extravagant gifts, adding just one more item to the shopping cart, choosing premium seating at concerts, opting for five-star accommodations, and seeking comfort in first-class cabins.

These choices, while seemingly trivial when viewed separately, can accumulate, leading to a significant rise in your cost of living.

Keeping lifestyle creep at bay

A gradual increase in lifestyle can be harmless, but it shouldn’t impede your financial goals.

Research by the Federal Reserve Bank of New York suggests that real wage growth is most pronounced in the early stages of a career, plateauing as one reaches mid-career, and peaking in the 50s.

This data underscores the necessity of managing lifestyle creep early in your career. To do this, a system that prioritises saving is essential.

A certain amount of lifestyle inflation is natural, but it shouldn’t come at the cost of your financial targets.

A method like reverse budgeting treats savings as non-negotiable expenditures and automates financial processes to prioritize saving over spending. This strategy not only helps in curbing unnecessary expenditures but also ensures expenditures align with your values and goals.

Creating a better system

Humans are creatures of habit, often preferring the ease of routine over the challenge of change, which is evident in our daily activities.

Despite this, the ease of automating finances today can help us circumvent our tendency to resist change. By setting up automated savings increases, particularly when our earnings rise, we can reinforce our savings habit.

When automatic savings increase isn’t an option, a simple reminder set at the beginning of each year to up your savings can be effective.

This ensures that any salary increases are allocated to savings before becoming a part of your usual spending pattern.

A well-thought-out financial system involves making intentional choices about how to allocate our resources.

Such a system channels funds towards our most significant priorities and keeps us on course to achieve our ultimate financial goals. It also helps in mitigating the inclinations that may lead to suboptimal spending, saving, and investment decisions, including the often inadvertent yielding to lifestyle creep.

The information provided on this site is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if these strategies and products are right for you.

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