When I graduated from college, I was rich. I made $55,000 a year…with a $20,000 bonus. Could you even imagine being richer than that? At the time, I couldn’t. I rented a (sad) apartment on the Upper East Side, took a cab to work everyday, and bought martinis for all my broke friends at night. And after my first year of working, I ended up using my bonus to pay back my credit card debt. Wait? What happened to all my riches?! In the subsequent years, I made more and more money. I also lived in nicer apartments, had a killer wardrobe, and took lavish trips around the world. Oh and I kept buying everyone martinis. Yet I was still struggling to make ends meet. What was going on? I didn’t know it at the time but I was experiencing lifestyle creep.
This idea of lifestyle creep is an organic problem and if left unattended could really mess you up financially. I’ve experienced it firsthand, as have most of my friends and clients. How do you stop spending more money as you move up the ladder to success? How do you avoid the pitfalls of the “creep”?
The first thing to understand about lifestyle creep is that it is natural and part of movin’ on up (The Jeffersons, anyone?). It is a normal and expected part of your career progress to want to create a better lifestyle for yourself as your start to make more money. For example, no one expected that I would live in my dumpy apartment for very long and clearly as I made more money, I could upgrade my wardrobe from Express to Banana Republic to Theory and beyond. However, the issue for me was when I started to stretch myself thin. I got an apartment that I really couldn’t afford. I started staying in hotels that were way too nice for this stage in my life. I continued to buy everyone and their brother drinks at night. And that’s where the trouble really began.
It’s pretty easy to see if the creep is impacting your life. The first sign is if you are living paycheck-to-paycheck. If you don’t have ample savings but you are making good money, then something is clearly amiss. Even if you have some savings and are notstrugglingper se, you could still be subject to the creep. In my personal experience, I had some money saved and I didn’t live paycheck-to-paycheck, but I was spending entirely too much and saving far too little for the amount of money I was making. Looking back, had I been more aware and thoughtful about the creep, I would likely have a lot more money today. If you aren’t sure if you’re living the creep life, calculate your monthly overhead and compare it to your monthly income. If your income is a lot more than your alleged overhead, but you aren’t sure where that extra money is going, you are experiencing the lifestyle creep.
Say you make $6,000 per month after taxes. Your overhead (your fixed costs like rent, utilities, car payment, insurance plus your variable expenses like food, clothing) is $4,000. That should leave you with $2,000 left over each month. Do you know where that $2,000 is going? Does it seem like a big mystery to you? If so, the creep is to blame. If you have no idea where that $24,000 each year is going and you don’t have a savings account and/or are paying off any credit card or student debt, you have to get real with yourself.
I meet a lot of people who make tons of money, but carry around credit card debt. It’s always rather frustrating to me when this happens because it means that the person is living beyond their means. At the end of the day, lifestyle creep is essentially just living beyond your means. “Ooh I got a $5,000 raise,” you think, and then decide to take a trip to Cannes. The financially responsible response to this $5,000 raise is: “Let me figure out how much more I can save each month (and maybe treat myself to a new pair of boots).” Over time, you have to control your income adjustments and make sure you are being deliberate about more income flowing in. If your new raise adds an extra $1,000 per month to your paycheck, you should be trying to save at least half of that. This way, you can still enhance your lifestyle and start building your wealth.
In order to control the creep, you first must know how much you are making versus how much you are spending. If you are overspending, you need to create a budget, cut back, and make some lifestyle adjustments. If you are breaking even, you need to start figuring out ways to save money. If you are saving some money but you know it’s not enough, you need to make saving more money a priority. I want you to be rich, and rich people don’t get rich by spending all of their money.
Saving isn’t that hard when you are deliberate about it. Start paying yourself first. At each paycheck, start moving money out of your checking account into a totally separate savings account that is more difficult for you to access. Start saving a number that doesn’t scare you but makes you feel a little uncomfortable. If, over time, you simply cannot live without that money, then you can adjust. If you start out with $200 per paycheck and after a few months you realize that you don’t miss it, increase the amount. Over time, this money accumulates and you start to forget it even exists. Once you have reached a certain threshold of emergency savings, you can then start investing that money.
How many times have you heard the sad story about a famous movie star, professional athlete, or rockstar who is wildly successful but is totally broke? Every time I read a story like this I wonder “how is this possible?!” But the answer is quite clear—they have been subject to the lifestyle creep. Every time they got a new contract or movie deal, they would increase their overhead. Eventually, the next new contract doesn’t arrive and there is no money to pay for that luxe lifestyle. My point is this: Just because you make a lot of money doesn’t mean you have to spend a lot of money.
There may also be a time in your life when you are making a lot less money, so it’s important to save now! I know this because it happened to me. I had a job that I hated but it paid me a lot of money and allowed me a certain lifestyle. Don’t get me wrong, I miss shopping, the Four Seasons, and the martinis. But now, I have a different perspective on money and spending. I don’t feel the urgency to upgrade my home just because everyone else is. I am comfortable driving my six-year-old car because it’s still fast and handles well. I now am much more concerned about saving and investing for my future so I can live a comfortable life down the road.Bottom line: Don’t let the creep mess up your future. Save more, spend less. Amen.
Kristin O’Keeffe Merrick is a Financial Advisor with O’Keeffe Financial Partners, LLC, 100 Passaic Ave., Suite 100A, Fairfield, NJ 07004, 973-227-3660
Views expressed are not necessarily those of Raymond James Financial Services and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. O’Keeffe Financial Partners, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services.