There are many obstacles towards achieving wealth. We’ve identified several of them already as summarized on the page: Your Enemies Towards Financial Freedom
And today, we’re adding another one to the list, Lifestyle Creep.
What is lifestyle creep?
Lifestyle creep, or lifestyle inflation as it is also called, is what happens when your income increases and you start upgrading your lifestyle instead of doing proper money management first.
This is the worst enemy of your budget and one that many least notice. But how does lifestyle creep actually happen?
As an example, imagine an employee with a P20,000 monthly salary. After a year, he gets appraised and his income goes up to P24,000 a month.
What’s the usual thing that happens next?
That person begins to adjust his lifestyle, improving it according to the extra money he’ll receive.
Thinking he now has an “extra P4,000” every month, he suddenly buys a new smartphone and decides to enroll in a gym. Then, his once a month movie night becomes once a week. Lastly, he starts eating out more often.
The end result?
The things that he formerly thought of as luxuries, has slowly become “necessities”. He now “needs” to go to the gym to stay healthy. He “needs” a new smartphone because he uses it a lot for work. And so on…
And after several months, he begins to wonder why he can’t save any money despite having a bigger salary.
It is because that’s exactly what lifestyle creep is and we all experience it.
There’s really nothing wrong with wanting to improve our lifestyle, but the right way to do it is to be prudent about our budget and do proper money management.
How To Avoid Lifestyle Creep
You can start by realizing that the “extra P4,000” is actually just around P3,500 net of taxes. So if you want to improve your lifestyle, then you have to know exactly how much you’re now taking home. You’ll be surprised at how smaller it is than what you think.
Second, go back to your personal finance basics and recreate your budget according to the new income you have.
More importantly, remember that when your income increases, then the portion that you set aside as savings should increase too, along with the cash allocation that you may have for debt payments.
Lastly, and actually the best solution against lifestyle creep – is not to let the extra income change how you live.
I can imagine the guy in our example being able to live comfortably at P20,000 a month gross income for the past year – so there’s no question that he can’t continue living that way.
So instead of upgrading his lifestyle, he can just use that “extra P4,000” a month to build his emergency fund if he doesn’t have one yet, or to spend it on buying investments.
Isn’t improving your lifestyle the point of making more money?
My answer to that is Yes and No.
“Yes” – we work hard so we can live better – and that means giving our long-term goals more priority over short-term pleasures.
We all have limited time as productive individuals. Someday, our skills and knowledge can become obsolete and our bodies can no longer afford to work. And when that time comes, you have to make sure that you have other sources of income than yourself.
So, “No” – the money we get from our active income should not solely be used to improve our current lifestyle. But more importantly, it should be used to secure our future and create passive income sources.
So that when you retire, your lifestyle will be a happy and comfortable one. Take a stand against lifestyle creep, improve your money mindset today by subscribing to Ready To Be Rich.
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