It’s no surprise that the majority of American’s live paycheck to paycheck, but it may be a shock to learn that 18% of Americans that earn $100,000 or more are stuck in the same boat. Most of this phenomenon is caused by Lifestyle Creep. It eats away at paychecks and leads you to live a life with neutral to negative cash flow even if you’re a six-figure earner.
What is Lifestyle Creep?
Lifestyle Creep is the increase in cost to maintain one’s lifestyle with raises in income.
Lifestyle Creep affects most people who grind the 9-5. That big raise tends to go towards a bigger house, nicer car, and more clothes. Instead of keeping monthly expenses the same, they go up as your income goes up. This leads to the struggle of getting by with a higher paycheck.
The key to building wealth is to break the Lifestyle Creep habit that has a hold on most of America. Try using some of these tips to reduce spending, and stop living paycheck-to-paycheck.
1. Automatically Set-Aside Your Raise
The easiest way to avoid spending is not having the money in the first place. The next time you get a yearly cost of living increase or a big promotion, have this amount automatically wired to a different account. Ideally, an account that is separate from your main checking account. This way you won’t even miss it.
It may feel like you are losing out on not having the extra money to spend, but after a few months, you’ll notice a small nest egg start to form. Following this easy strategy will enable you to keep your spending as is while continuously saving.
Setting aside your annual raise works best for those who are living a comfortable lifestyle and aren’t great at sticking to a budget. These people may not “need” the extra income, but when they get a raise spend recklessly.
2. Split Your Yearly Raise
Okay, so you’re not too fond of the idea of missing out on your entire raise. Understandable. Try splitting your raise with yourself instead. If that yearly raise ends up being $100 / month, incorporate $50 into your budget and the other $50 into a savings account.
This is the method I use for raises; it gives me the feeling that I can live a more expensive lifestyle while incorporating savings at the same time. Splitting your raise works regardless of the amount of the increase. This can be a very effective savings tool if you jump jobs or get a new promotion. That $10,000 promotion automatically puts $5,000 a year in the bank. If used consistently for yearly salary increases this will compound into large values over time.
3. Treat Yourself on Bonuses, But Save the Majority
Two out of three employers give out bonuses based on yearly performance. Bonuses give Americans more spending power and equally more funds to invest/save at the end of the year. Unfortunately, a University of Chicago study showed that Americans tend to readily spend money when it comes in form of a bonus instead of investing or saving.
So how do we avoid blowing our bonus on luxury goods? Use the same methodology of splitting your raise and apply it to your bonus. If you have more discipline, try and save the majority and use 10-20% to splurge on something special. Instead of saving everything, this allows you to go on a small spending spree, while still feeling responsible.
Bonuses can also be a huge way to expand your savings, which would normally take months to build up. Thus, propelling you towards leaving the paycheck-to-paycheck spending cycle. Typically bonuses are not included in a budget and could allow you to save hundreds or thousands of dollars all at once.
4. Keep Housing & Auto Costs Low
Two big offenders on everyone’s balance sheet are housing and auto costs. Housing costs are often the largest reoccurring expenses and can be the largest drain on your bank account. They can also be the easiest to avoid in terms of growing costs.
There is nothing wrong with wanting to live in a nice place and upgrading your current living conditions with income increases. The issue comes when it drains the majority of your income and you become house poor. At the very most, you should not spend more than 28% of your total income on housing. Use this as a benchmark when budgeting this portion of your monthly expense.
Auto costs are another big expense that can be easily avoided. Just because you receive a big promotion, doesn’t mean you can afford that brand-new Mercedes. Be responsible when car shopping. Once you pull the trigger you’re stuck with it until you sell or the lease is up.
If you choose to buy, keep in mind that cars are a depreciating asset. The value of the car will only decrease in time. That is why my general recommendation is to never buy new, and when you buy used, try to purchase a model with a few years on the road to get the most of your money. When purchasing any depreciating asset, make sure to do your homework, and get the best price possible. This is money you will never get back in any type of return.
5. If the Purchase Requires a Loan, Reconsider
More and more companies are popping up that provide financing for everyday purchases.
Want a new jacket? Only $20 a month for two years!
This trap can easily add up over time. No money down might seem like you’re getting the goods for free but leads you towards more and more debt. This can quickly add up, think hundreds of dollars in reoccurring expenses. For these types of items, if you require a loan to purchase them, it is best to opt-out altogether. These “good deals” can easily lead to Lifestyle Creep and the paycheck-to-paycheck cycle.
These types of loans are different than mortgages for a few reasons. First and foremost, mortgages provide you with a necessity (shelter). Most likely, if you don’t have a mortgage you are paying rent. This money is going towards someone else’s bank account instead of your own. Either way, you will have to pay for some sort of housing. In the case of the jacket, this money would otherwise go straight to your savings account.
You can’t compare mortgages to the finance payments of ordinary goods. These finance payments are not NEEDED but rather WANTED. Don’t touch unnecessary financing with a twelve-foot pole.
6. Don’t Subscribe
You heard me, don’t subscribe. Especially to reoccurring shipments from the latest “box subscription” or reoccurring payments on amazon. It’s one thing to subscribe to Netflix or Hulu to view content daily, but when it comes to new clothes or dog toys, purchase these on a one-time basis.
According to a study by West Monroe Partners, 84% of people underestimated what they spent on subscriptions. The participants were also less likely to notice how much they spent on wellness apps and subscription boxes. The study shows that people don’t realize the extent that subscriptions can have on our finances, and that we’re paying for apps and boxes that we might not even be using.
Instead of using a subscription, try the “buy it when you need it” method. Subscriptions tend to build an excess amount of goods that you normally wouldn’t accumulate in the first place. If you only purchase items that you need when you need them, you save on purchases in excess.
Having hundreds of dollars in subscriptions per month is yet another cause of Lifestyle Creep. Take a break on the subscriptions and throw what you use to pay on reoccurring expenses directly into savings.
Utilize the tools you now have and start putting raises & bonuses in the bank instead of having the best night out. Spend responsibly on housing and car purchases. If you must pay for ordinary goods every month to afford them, don’t even bother making the purchase. Any other suggestions for breaking the paycheck-to-paycheck cycle? Leave them in the comments!
