If I Just Made More Money, Things Would Be Easier, Right?
by Matt K. Logan CFP®
“I don’t understand why that person would ever have anything to worry about, if I made that kind of money I would not have any problems.” It sounds logical. I know I have thought this in the past and heard others make similar statements. This may come as a shock to you but due to what researchers call Lifestyle Creep.
What Is Lifestyle Creep?
Lifestyle Creep is when your spending grows to meet your income. The theory is fairly easy. Early in your life as you set out on your own, you lived off practically nothing. Think of your first years and renting or your first home. If your income has grown over the years even at a small average, you likely enjoy a much nicer lifestyle than you did 10 or 20 years ago. At the time, you most likely didn’t feel that bad about it and you still made ends meet. Imagine if you still maintained those expenses and had your income you have now? As you progress in your career and age, many people earn more over the years. With that higher income, you also begin to use more funds towards creating a higher standard of living. The cycle continues throughout your life. You become accustomed to things you may not have thought were necessary in your early career such as a gym membership or that morning Latte. To illustrate it better, look at the chart below. You can see how those with lower incomes save a much smaller percentage towards retirement. You can also see that those who make more than $150,000 a year spend a similar percentage on housing as those who make $15000 to $20000. This shows that their housing requirements have risen with their income, illustrating the Lifestyle Creep.
Are You Experiencing Lifestyle Creep?
A good way to look at this as it compares to your own life is to look at your social security statement next time you get one. It is interesting to look at if you never do. Take a minute to look at the page that shows your earning record. Here is an example. Now think for a minute back through those years. I am fairly certain the example who reported income of $22,240 in 2000 is not living the same lifestyle they did in 2012 when they reported $45,718 in income. I would also make an educated guess that they are not two times as happy as they were then even though their income has doubled.
Why Is Lifestyle Creep Important?
If you can control lifestyle creep, you set yourself up for financial success. This plays into the whole keeping up with the Jones’ thing. I think back to a childhood friend. He could never understand growing up why he would go to people’s homes who worked for his father and they had much nicer homes and much higher lifestyles. He assumed that because his father was in a higher position at work that he would have a larger home. When his father retired at 55 and enjoys homes on both sides of the United States the light bulb went off. He realized that his father was earning more and that he chose to save instead of allowing Lifestyle Creep to play a factor in his life. If you can control it in your own life, your natural income growth over the years will result in a stronger financial position by leaps and bounds. You will be able to retire earlier because you will require less funds to keep up your lifestyle in retirement and you will have saved more throughout the years. This little theory could have a significant impact. Take a look at the graphic below for a good explanation.
How Can You Fight Lifestyle Creep?
A good way to manage lifestyle creep is to budget. If you experience a raise, you should put more of a percentage of your income towards retirement than you did previously. While increases in your lifestyle are normal, being deliberate and keeping them in check can pay off in huge ways in combatting Lifestyle Creep. It goes back to the whole spend less than you make thing. If as your income rises over time, your spending rises at a lower rate, you are doing a great job fighting Lifestyle Creep.
So next time you hear a friend say, if I just had more money, things would be different you can be the odd guy that tells them that works only if they can overcome Lifestyle Creep. Well, maybe that is not a great plan on second thought buy you could explain it to them.
You can also go to my website www.mattloganinc.com for more information on financial topics you may find helpful.
Matt Logan Inc is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.