I changed jobs recently and got nice salary increase. But the amount I’m saving dropped because I’m spending more. Got any tips for preventing this lifestyle creep?
For people who maybe haven’t heard the term before, “lifestyle creep” refers to making more money and then spending more money. This often leads people to try to make still more money, which they then end up spending. It is an upward cycle of earning and spending.
There are two major downsides to lifestyle creep. One is that it only continues to function if your income stays steady or rises. If your income drops (due to cutbacks at work or changing jobs) you may find yourself with a lot of expenses and less income to handle it. In a similar fashion, people have have allowed lifestyle creep to happen sometimes feel trapped. They might want to change jobs, cut back their hours, or take a vacation but feel they cannot because they have too many bills to pay.
In the short term, one of the best ways to prevent lifestyle creep is simply to keep the same budget you had before the raise. Don’t upgrade your phone plan, don’t buy a new car, don’t buy a larger place, don’t suddenly start going out for more meals or planning extra vacations. Just stick to the budget you had before the raise and let some savings pile up in your account. Give yourself a little time to adjust to the idea that you’ve got more money coming in.
Lifestyle creep often happens because people are excited they suddenly have more money. You commonly see this sort of behaviour with lottery winners. They get caught up in the excitement and spend all the money and are left with a lot of bills and a lot of debt. Making yourself hold off spending more money for a few months gives that rush of excitement a chance to pass and it gives you more time to plan a reasonable budget.
On the topic of making a new budget, one of the best things you can do for yourself when you get a raise is to pay your future self first, before you spend any of the new money. Whenever I receive a new raise, I sit down and make a new budget and basically decide, “Half of my new income goes to future me/investments.” The other half of my raise goes to my bank account to be used, or not, as desired.
Basically, if I started making an extra $10k a year, I’d adjust my budget so at least $5k went into my investments first. Then whatever was left over was for me to enjoy. Since the money was automatically coming out of my account and into investments as soon as I got paid I never got to touch it. As a result, I never missed having the extra money, it was never really in my hands. I still had more money in the bank to spend following my raise so it was a win-win situation for both present me and future me.
I recommend, whether you’re receiving a new raise or not, it’s always a good idea to pay your future self first. Put the money into an investment or into a GIC to keep it out of your hands. Then you’ll have it down the road when you need it. Automatically transferring money out of your account for your future self also cuts down on lifestyle creep which might trap you in a pile of new bills.
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