Lifestyle creep can happen to anyone. When income increases, lifestyle spending naturally increases, too — sometimes to the detriment of savings and overall financial health. Certified Financial Planners can help their clients to learn how to identify the creep and maintain positive spending and saving habits to support their long-term personal and financial growth.

What is lifestyle creep?

Lifestyle creep, or lifestyle inflation, is a change in spending habits associated with an increase in disposable income. This can be as small as daily coffees from a cafe instead of brewing at home, or as substantial as choosing to shop for designer clothes instead of browsing less expensive stores.

The occasional nice dinner out or clothing splurge is one benefit of extra cash, and doesn’t necessarily indicate lifestyle creep. But habitual overspending after an increase in income is a sure sign of the creep.

How lifestyle creep can impact finances

Lifestyle creep encourages spenders to buy more and buy bigger. Excessive spending on material items can compound and have long-term effects on financial health. The more your clients spend on a new designer wardrobe, the less they have to invest in savings goals, like retirement planning.

This can also impact health and happiness. Overspending may lead to financial stress, and will leave clients unprepared to manage the financial strain of a large unexpected expense, like a car or home repair, if they aren’t contributing to an emergency savings fund.

Four green coffee mugs stacked precariously about to tip over on a light green background.

Let’s say your client lives a comfortable lifestyle with a manageable amount of debt, and was just given a 5 percent raise at their last performance review.

When the raise shows up in their bank account, excessive spending habits start to creep in. This may look like:

  • Going out for drinks or dinner several times a week
  • Renovating their wardrobe with designer accessories
  • Financing the newest model car
  • Buying a boat for summer outings
  • Upgrading multiple pieces of furniture or appliances

Encourage clients to consider the lasting impact of these lifestyle changes. Taking on debt for a luxury car when their current ride only has 90,000 miles extends beyond the sticker price of the car. Standard maintenance on luxury cars is far more expensive than regular mid-level vehicles, and the car itself is a depreciating asset with little potential for financial returns.

Alternatives to spending habits that create lifestyle creep may include:

  • Going out for a monthly brunch with friends
  • Investing in a tailored suit for the office and interviews
  • Paying off an existing auto loan
  • Planning a lake weekend with family

In most of these cases, there’s a positive benefit to the purchase without increasing day-to-day cost of living. There’s a big difference between doing intermittent or smaller things with the extra cash vs. engaging in activities or habits that will accumulate debt over time.

Tips to avoid lifestyle creep

Here are some tips you can apply in your practice to help clients invest in themselves and avoid the ramifications of lifestyle creep.

1. Create a detailed budget 

An updated budget can show clients how much disposable income they earn, where they’re spending it, and opportunities for smarter spending.

Have your clients gather their total monthly income as well as fixed and variable expenses. Look at their last few bank statements and help them determine where they’ve spent their discretionary income. Group similar items together, like clothing and accessories, dining out and entertainment. Remember recurring costs like phone bills, insurance, and subscriptions.

Now review the budget to determine where they can make smarter spending choices. They should continue to update monthly spending to identify needs, wants and ongoing habits to find a budget breakdown that works for them.

2. Set a specific savings goal

A detailed budget will help clients set specific savings goals to contribute to each month. They should also understand that long-term goals like retirement and homeownership are just as valuable as short-term ones, like a weekend getaway. A mix of goals allows them to balance fun with responsibility, and reap the benefits of smart savings periodically.

Investing money into savings or other places also grows their investment with interest, so they ultimately have more to spend. Immediate material purchases don’t offer the same benefits, and the joy of a new jacket may not be as meaningful as a family vacation.

3. Practice money mindfulness 

Mindfulness is the practice of identifying thoughts, feelings and intentions in a given moment. Encourage clients to practice money mindfulness as it applies to their spending, so they can consider the implications of their financial decisions beyond the immediate gratification.

This may include waiting 24 hours to make any unbudgeted purchases or adding items to a wishlist so they can buy them later when it fits in their budget. Reviewing their budget regularly to reevaluate past purchases can also help inform future decisions.

4. Invest in yourself

Let clients know that one of the best ways to spend their money is to invest in themselves and their well-being. This looks different for everyone, depending on their lifestyle and goals.

For example, if they’d like to accelerate their career, encourage them to consider rerouting extra money toward continuing education, certifications or industry associations. Or if they’d like to improve their health, they might join a specialty gym or buy a new appliance to help them prepare meals at home.

Health and happiness are always positive goals, so have clients think about where they can invest to better their lives.

5. Declutter at home

A 2016 study found that cluttered homes increase stress levels at home. Excessive clutter may also signal a spending problem. Encourage clients to spend a few days organizing and cleaning out their space.

Decluttering their home may also help identify spending habits. If they find several pairs of sneakers they only wore once or twice, they may want to reconsider their collection and budget for future sneakers.

Regularly cleaning and decluttering their home and selling old items is a good way for clients to make some extra cash and offset some expenses, too.

Beat the creep

All work and no play isn’t healthy for anyone, but smart spending can help your clients balance fun with positive investments for their future. For more tips on how to help your clients avoid lifestyle creep, check out this guide from Annuity.