Lifestyle Creep and How Not to Lose Your Raise

Most people believe getting a raise, and earning more money, is a good thing that gets them closer to a comfortable retirement. But what if your raise triggers a desire to “upgrade” your life?

New car, bigger house, new clothes – all innocent on the surface – but if new expenses equal or surpass your increase in pay that means you’re worse off! Why? Because your net income (what you have leftover after paying expenses) has gone down.

That’s lifestyle creep.

An increase in wage means nothing if it’s met with an equal increase in expense. At the end of the day, the only thing that gets you closer to living financially free, is more savings, more investment and more assets that earn you passive income.

When you receive a raise, if it doesn’t increase or accelerate your path to retirement (or being free from your job if you are looking to FIRE) then it hasn’t benefited you. Not really.

Younger workers hit hardest by lifestyle creep

The problem of lifestyle creep hits younger workers the hardest. This is because they have the most to gain from early investing.

Due to compounding, even small increases in investments have the potential to pay off big in a long enough period. Younger workers may also face more social pressure to keep up with friends who try harder to appear successful than follow a sound financial plan and be it.

The result is even high earning workers end up living paycheck to paycheck.

Rules to prevent lifestyle creep

The biggest mistake most people make is overspending on housing. Experts suggest to keep housing costs below 20% of your net income. Saving and investing should match, or exceed, what’s spend on housing. Meaning at least 20%.

Before you consider a big lifestyle upgrade – new car, bigger house – make sure to match it on the investing side. Then ask yourself if you can afford to increase both.

If you realize you can’t, and the only solution is to raise expense and not investment, that’s the warning to pause, and reconsider. That’s creep setting in.

This isn’t to say you should enjoy and celebrate your raise. You should, but view part of that reward as accelerating your investment, and shortening the time until you can retire completely, or partially, from your job.

That’s worth celebrating too isn’t it?

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