Receiving a pay rise or a promotion can be a great feeling. It’s often a reflection of months or even years of hard work and, as a result, you may want to treat yourself with your extra income.
While there’s nothing wrong with rewarding yourself, if you automatically increase the amount you regularly spend in line with your income you may miss out on the opportunity to maximise your savings and investments.
This phenomenon is known as “lifestyle creep”.
Financially preparing for your future is very important yet, worryingly, the BBC reports that 2 in 5 working-age people – around 13 million UK workers – are not currently saving enough for retirement[1].
Lifestyle creep can play a role in limiting your savings, so it’s important to know how to spot it and avoid it. Read on to learn more.
How to spot lifestyle creep
It’s very easy to spend more as you earn more. You may feel the need to “keep up with the Joneses” and try to emulate the wealth or success of your peers.
Alternatively, you might simply feel you deserve to spend more as you’re working harder to make more income. This is a reasonable view – of course you deserve to enjoy the fruits of your labour! However, it’s important to be aware of the problems that could occur when you increase your spending by too much.
Spotting lifestyle creep can help you nip it in the bud, protecting your long-term finances.
There are a few signs to look out for:
- Starting to buy from more expensive shops
- Purchasing more name-brand goods
- Eating out more often
- Giving larger gifts to friends and family
- Increasing your credit card debt.
Everyone is different, so any symptoms of lifestyle creep will be unique to you.
Lifestyle creep could hamper your long-term financial plans
Small upgrades in spending like subscribing to more streaming services may feel inconsequential but could end up having a lasting detrimental effect on your finances in the long run.
For example, spending an extra £100 a month on subscriptions or takeaways could, over the course of a year, cost you £1,200. If you put that money towards saving instead, over multiple years you could save substantially more. And, thanks to the positive effects of compound growth, you may find you’re able to enjoy an earlier or more comfortable retirement.
Allowing your spending to creep up could also lead to higher levels of debt. Indeed, Money Marketing reports that high earners are more likely to have borrowed at a higher percentage of their income[2].
Fortunately, by spotting the signs of lifestyle creep you can quickly take steps to prevent it.
Adopting some healthy habits could help you avoid lifestyle creep
Prioritise your financial goals before you make any decisions
When you receive your first pay cheque after a salary increase, you may be tempted to treat yourself to dinner in an expensive restaurant or go on a shopping spree.
However, it could be useful to take a moment to set some financial goals before you spend any money.
Long-term goals can help you:
- Stay motivated
- Give you a sense of progress over time
- Help you to prioritise your spending.
Understanding your goals could stop you from spending money that might be better used elsewhere.
Review your budget
You may already have a budget to keep track of your income and expenditure, and to help you work towards your long-term financial goals.
If so, that’s great, but it’s also important to take the time to update your budget whenever your income changes.
So, each time you receive a pay increase, make a point of reviewing your budget and update it with your new income. This will help to give you a good idea of how much you could increase your spending by without derailing your long-term plans.
Even if you haven’t enjoyed a recent pay rise, regularly reviewing your budget could allow you to spot signs of overspending, and take action to rein it in.
Pay yourself first
As you’ve read, one of the dangers of lifestyle creep is that you could find yourself spending money that you could be saving or investing.
Fortunately, a simple change could help you avoid this.
By “paying yourself first” as soon as your salary lands in your account, you could ensure you save and invest your money before you have a chance to spend it. You could even automate this process so there’s no chance of being tempted to put off contributing to your savings.
By saving on pay day, you can spend your remaining money with the reassuring knowledge that you’re also building wealth for your future.
Work with a financial planner
A financial planner can help you stay on track as you progress through your career, keeping your long-term goals in mind while ensuring you have enough to enjoy the day-to-day lifestyle you desire.
We can take an in-depth look at your income and expenditure and advise how much you should be saving and investing to reach your long-term financial goals.
We can also review your financial plan whenever your circumstances change, which could also help you to avoid the dreaded lifestyle creep.
Get in touch
If you’d like help determining your long-term goals and designing a financial plan, we can help.
Email info.wp@titanwh.com or call us on 0800 048 0150.
Risk warnings
The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation for any investment or retirement strategy.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
[1] https://www.bbc.co.uk/programmes/articles/2ZqWdpFf8X0DC718s9nCZjk/will-you-ever-be-able-to-afford-to-retire
[2] https://www.moneymarketing.co.uk/news/high-earners-more-likely-to-fall-in-debt-trap/
