Have you noticed that as you earn more, you may not seem to have more in terms of growing your wealth, including your retirement account or that fund for the down payment on a house?
You might be experiencing lifestyle creep, which means that as you earn more, you spend more. It may well be human nature that, when you get a salary hike, you decide to splash out on a fancier car lease, a bigger home, or a luxurious vacation.
However, your spending may actually be outpacing your salary and even ringing up more credit card debt.
That’s lifestyle creep in action: Spending on “fun” non-essentials instead of putting that money to work for a more stable financial future. Learn more about it and how to rein it in while still enjoying the things money can buy.
What Is Lifestyle Creep?
Lifestyle creep can be a common phenomenon experienced as one progresses through their career. Lifestyle creep, sometimes known as lifestyle inflation, is the process by which discretionary expenses increase as disposable income increases.
Disposable income is income that isn’t already budgeted for necessities like housing, transportation, and food.
It could include anything from concert tickets to morning lattes to book buying sprees — basically anything that is likely to fall more into a “want” category rather than something strictly “needed.”
Lifestyle creep can put you squarely behind the 8-ball when it comes to getting out of debt, saving for retirement, or meeting other big financial goals. And it’s one reason people can’t escape the vortex of living paycheck-to-paycheck.
It might seem counterintuitive at first, but here’s a simplified example using a clothing budget. If you make $100 a month and set aside 5% for a shopping allowance, that’s $5 a month. If you earn a promotion at work and are now making $150 a month, that 5% now equates to $7.50 a month.
Lifestyle creep happens when you up your clothes budget to match the percentage, instead of putting the extra $2.50 toward savings or investments. Over time, those numbers can add up. And earning more isn’t all fun and games. It can also mean more expenses, and larger retirement goals.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
What Causes Lifestyle Creep?
Graduating from the penny-pinching college life to your first full-time job is only one instance that can trigger lifestyle creep. It also can happen with any type of bump in cash flow that’s not part of your monthly budget, such as a raise, bonus, tax refund, gift, or winning a scratch-off ticket.
There are also psychological factors at play here, including the sometimes compulsive urge to keep up with the Joneses.
And before you blow it off as just envy with a lack of willpower, consider this: One examination of a lottery winner’s effect on the neighborhood found that the larger reward the lucky gambler collected, the more likely their neighbors were to incur more debt and even file for bankruptcy.
Say what?!
The social pressure to keep up with the consumption habits of family and friends, even when it’s conspicuous, can cause real and serious financial stress.
Social media can make matters even worse, with studies showing that post envy could be causing people to live beyond their means just so their feeds can reflect their acquaintances’.
But how do you resist the urge to upgrade your 2010-era sedan when your neighbor rolls up in a shiny new SUV? The answers might be simple on paper, but switching your mindset from “Should I spend this on a shopping spree or a vacation?” to “Should I put this money into savings or invest it?” can be easier said than done.
Discerning Needs Versus Wants
It’s normal to want to celebrate a new raise, but to avoid lifestyle creep, it can be important to make sure not to celebrate with something that will increase costs to the point of making the raise irrelevant.
For example, a person gets a raise that increases their income by $200 a month and then immediately trades in a fully paid-off car for a newer, fancier car (want), which results in a $300 monthly car payment.
Not only is the raise spent, but the amount of money available each month has also actually diminished. Sure, that person might have a car worthy of bragging about, but they may not be any healthier financially, even though they’re making more money.
On the other hand, for someone scraping by month to month, there might not be much of a choice but to fund some lifestyle upgrades with a raise. Lifestyle creep is not always a bad thing for someone working on being financially independent and secure.
Using the same example of the $200 monthly raise above, the recipient of the raise uses that money to buy a car needed to get to work to replace a lengthy public transportation commute each day, or perhaps invests in a professional development class to gain career advancement.
Either of those decisions might be perfectly worthwhile lifestyle changes that someone might be happy to pay for with a new raise. After all, part of financial wellness is investing in oneself when possible to achieve goals.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.20% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
Tips for Avoiding Lifestyle Creep
Giving every extra penny of a cash windfall to a credit-card company doesn’t sound like much fun. But just knowing that lifestyle creep exists, and recognizing it in your own life, can put you ahead of the game when it comes to making better decisions with your money.
Here are a few possible ways you can avoid lifestyle creep while still enjoying the good things in life.
Celebrating Small
If you earn a raise, you should absolutely celebrate — especially if it’s higher than the average 2.9%. But to outsmart lifestyle creep, you may want to take a deep breath and resist the urge to run to the store for that expensive thing you’ve had your eye on. (What would Marie Kondo do?) Instead, consider a small way to congratulate yourself, like a dinner with friends.
Creating a Budget
One way to avoid lifestyle creep may be to give all income a job to do. Yep, that extra $200 a month shouldn’t just be chilling in a checking account with no purpose, like a freeloading cousin camping out on the couch.
Letting that extra money hang out in the checking account too long with nothing to do might lead to unplanned spending on a weekend trip or that budget-busting espresso maker that would be a tempting purchase. Putting that money to work might allow protection against impulse spending.
What exactly is “putting money to work”? It all comes down to budgeting. But don’t panic — gone are the days of lengthy kitchen-table sessions with bills and statements fanned out and calculations done by hand.
With the advent of online banking, most people are likely equipped with everything needed to make a budget right on your phone or computer.
Don’t have a basic budget already? Getting a raise can be a great time to crunch the numbers and be financially stable and responsible with that money. If there’s already a budget in place, a new raise is a great time to reconfigure the budget to make sure it still ticks all the financial boxes.
Avoiding Mindless Spending
Mindless or pointless spending might happen when there is unexpected extra cash sitting in the bank account. Much like the itch to spend that crisp, new $20 bill included in a childhood birthday card, there may be psychological and emotional temptation to spend money in the bank account without considering whether or not those new, modern table lamps or that brand new gaming system is really needed.
Casually buying unnecessary items could indicate compulsive or impulsive spending. This in turn could mean missing an opportunity to put money to work for the future, sustainably upgrading a lifestyle by planning ahead for financial growth.
Tracking Your Spending
When it comes to managing money, one question you don’t want to ask yourself is “Where did that money go?” Losing track of expenses could not only lead to a blown budget, but also overdraft fees, returned checks, or other unnecessary fees that could put you even further behind.
If you really struggle with this one, there’s an app for that. A large number of them, as a matter of fact. SoFi, for example, lets you see all of your accounts in one place to help you categorize and track your spending, set goals, and look for ways to streamline. It also can serve as the central hub for automatic payments to your bills, savings, and investment accounts.
Turn on the Auto-Pilot
One of the easiest ways to ensure that you’re only spending what’s in the budget is to automate as many payments and contributions as possible. After all, money you don’t have is a lot easier to not spend.
This strategy can start at work. If you get a raise, you might elect to increase your 401(k) contribution (or start one if you haven’t yet). And while it means that your take-home pay may not change, your retirement account can painlessly grow.
You also can automate bill payments and savings and investment contributions, all with the intention of getting the money out of your tempted hands ASAP.
Outlining Clear Goals
What’s your endgame? Do you want to retire early with a million dollars or more in the bank? Is owning a home a part of your plan? One key to avoiding lifestyle creep is to set long-term financial goals and keep your eye on the prize.
Two financial goals that can be beneficial to almost everyone include growing a short-term emergency fund and longer-term savings plan. But from there, the sky’s the limit and your goals are entirely up to you.
Avoiding New Debt
This might seem like a no-brainer, but you aren’t likely to get out of debt if you keep adding new debt to the pile. A recent report revealed that consumers are willing to spend up to 83% more using a credit card than they would with cash.
Ditching the credit cards is entirely possible — your parents and grandparents lived without them every day. Modern credit cards weren’t introduced in the U.S. until around 1958, which means that Boomers and their parents were raised on the philosophy that if you can’t afford it right now in full, you wait until you can.
And as the old saying goes, they turned out just fine.
Getting Your Head in the Game
Lifestyle creep likely isn’t impossible to reverse, but one could argue that the further you’ve allowed yourself to fall into the luxury lifestyle, the harder it could be to pull yourself out.
One way to get your head in the game is to make lists, starting with your needs (electricity) vs. wants (electric car.) From there, you could prioritize your “wants” and start to cut from the bottom.
Are there things in your life that just exist because they can? Consider eliminating them completely, or finding crafty ways to keep them around in more affordable ways, such as shopping consignment vs. retail or eating lunch out one day a week vs. all five.
And the jealousy that can mess with your head? All that glitters isn’t gold.
Choosing Your Friends Wisely
Peer pressure is a powerful motivator, but the perceived wealth of your friends, neighbors and acquaintances can be a far cry from the actual state of their finances.
If you seem to find yourself in situations where there’s pressure to overspend, including kids sports activities, nights out on the town, or an invite to a destination wedding, you may want to consider finding a circle of friends who share the same financial goals as you.
After all, it’s a lot easier to say “Let’s just cook at home to save money” to a friend who won’t pressure you to try the trendy new restaurant in town.
💡 Quick Tip: If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt, so try to eliminate that ASAP.
Spending a Raise
So what exactly should someone do with extra money after a raise? Paying more into a retirement account, paying off debts, or just putting some extra dollars towards a specific savings goal are some approaches to take.
A checking and savings account might be one helpful way to manage a raise and stay on top of a budget.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.
SOBK0723054