When your income increases, spending more can become a slippery slope. Why limit yourself to hawker fare when you can dine in a fancy restaurant more often?
Why fly a budget airline when a full-service carrier is much more pleasant?
Then comes the gym membership that is hardly used, the air conditioning you cannot live without and the expensive clothes.
Until one morning you wake up and ask, “How did I ever survive on RM2,000 a month?”
This is lifestyle creep, when consumption of non-essentials gradually increases and the standard of living improves along with the income.
It is not wrong to want to move up in the world but needs can get confused with wants and spending can easily get out of hand.
Here are some points to ponder in managing lifestyle creep.
1. Set financial goals to make smarter choices
Everyone deserves good things. But it is important to know that splurging now could affect future goals (the great power of compounding), assuming they have been set and written down.
Good financial goals are smart – these are goals you really want to achieve. These goals motivate self-discipline and act as guides as one navigates the ebb and flow of life.
A holistic financial plan that takes into account different aspects of your life and lifestyle, is actionable and is sustainable is needed – something a licensed financial planner can do.
A good budget will allow some leeway for the occasional treat. But when lifestyle creep sets in, the increase in spending should trigger warning bells.
Is spending more than was planned worthwhile knowing that it will impact the achievement of financial goals?
What if buying a foreign car today instead of a local one means you have to retire at 65 instead of 55? If the retirement goal is clear it is easier to spend wisely.
But, if the expensive car is worth working longer for, go ahead, but rework the financial plan.
Only you can make these choices, regardless if they are good or bad for your financial health. So keep your goals firmly in mind, have a financial plan, and review it regularly to account for lifestyle creep.
2. Pay yourself first
It can get quite thrilling seeing the figure on your paycheque as your income increases. But the number that should be looked at is what is left after you have paid yourself first.
Set up a standing instruction on a bank account to make automatic deposits at the start of the month to pay the bills and monthly debt and channel money to the respective funds – investment, emergency, retirement, savings and so on.
Now you can play with the leftover.
When the amount on your paycheck goes up, the best reward would be to review the financial plan and the budget. Sound boring? Think about it, this is money that can be channelled into achieving your financial dreams sooner, or to make more and bigger dreams.
Revise standing instructions for automated deposits. If life was comfortable with the budget last month, it will be just as comfortable this month.
3. Find the right kind of peer pressure
It is a fact that many people are affected by what others think. The difference is how easily an individual is swayed by these opinions.
If you’re the kind who’s easily influenced, surround yourself with like-minded people who build you up instead of tear you down. Find friends who understand the importance of sticking to the budget. They can be good sounding boards to discuss financial decisions that come with lifestyle creep.
Rather than spending foolishly on luxuries, they will encourage one to spend wisely. Material possessions do not define a person. Values do.
4. Make conscious, gradual lifestyle changes
Lifestyle creep is not entirely a bad thing. Yes, one can survive in a shoebox apartment eating instant noodles, but it would be extreme to continue that lifestyle with a family and a household income of, say, RM10,000.
Find a middle ground and define what a modest lifestyle would be. Make wise choices and adjust your budget accordingly. Review the long-term financial plan to stay on track to achieve your goals.
5. Lifestyle creep in the golden years
Retirement is usually celebrated — decades of hard work are finally over. But two important questions to ask are:
- Is the planned for retirement lifestyle sustainable when relying on one’s retirement funds?
- Is the comfortable lifestyle enjoyed pre-retirement sustainable when relying solely on retirement funds?
Think carefully and take another look at the retirement plan. Review it and gradually adjust it to ensure the hard work of a lifetime leads to a rewarding lifestyle.
Perhaps semi-retirement would be a better option?
Conclusion
As the phrase implies, lifestyle creep tiptoes up unnoticed. As your income increases, small choices can build up into large consequences.
Consider your choices and regularly review whether certain lifestyle decisions adversely impact your ability to achieve your financial goals.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.
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