Your investments: Get a raise? Beware of ‘lifestyle creep’

I think my top salary was maybe in 1966. I made $17,000 and 11 of that came from selling other players’ equipment.– Bob Uecker

By AARON KATSMAN

MAY 23, 2019 22:59

Money cash Shekels currency 521 (photo credit: Reuters) — Money cash Shekels currency 521

(photo credit: Reuters)

Recently my two oldest daughters got into a bit of a tiff over who was going to babysit for a certain family. The younger one said that she wants to get the job because she “really needs money.” Then the older one said, “you need money? For what? I am the one who really needs money because I have big expenses.” To which I quipped, “big expenses, huh? Planning on starting to pay a bit of rent?”

While I was happy that the girls were both trying to earn money to pay for things that they “need,” I was a little upset that all they wanted to do was use their money and buy things, instead of saving a bit.

The trap that I hope they don’t fall into is one that unfortunately catches many adults. How many of you get a raise at work and then complain that you still struggle to finish the month in the plus, let alone have nothing left to save and build wealth? If you are one of those don’t feel bad. You are part of a very large group of people that have gotten caught in “lifestyle creep.”

Dr. Kevin Nguyen, writing on whitecoatinvestor.com defines lifestyle creep as “the slow but steady changes in a person’s spending habits and standard of living. Just received a raise? Go buy a new pair of shoes. Year-end bonus? Go put money down for that car. Graduate from residency? Go buy a new house, new clothes, and finally start living. Certainly, it’s not wrong to want to do these things, but lifestyle creep can damage your long-term financial goals and should make anyone suspicious of their spending habits. The danger of lifestyle creep is that it often goes unnoticed. You may start off by rationalizing small purchases. By themselves, it may seem like nominal increases to your standard of living, but together, this can add up dramatically and slowly your lifestyle has changed. A higher lifestyle brings higher expenses, and failure to address this can lead to lost opportunities on saving and investing in your future.”

Years ago, I met with a successful woman who had just been hired as a consultant and was traveling the world, and making a lot of money. She was complaining that just after a few months of earning a salary that was triple what she had been making previously, she had put nothing in savings, and was uncomfortable with her money situation. We came up with a plan to allow for her to increase her lifestyle but plan for a secure financial future. After the plan, I never heard from her again, other than seeing some occasional social media posts of vacations in faraway lands, dining in fancy European restaurants which indicated that she was really living the good life. Well lo and behold, she surfaced a week ago and she wanted to meet. She told me that after making all that money over the years, she was embarrassed about the little savings she had accumulated and that now she wanted to get serious.

Here are some tips I gave her, which will help you both increase your standard of living and long-term savings.

Budget: Take control over your spending. Track income and expenses and then you can start a realistic savings plan and start building wealth. By actually creating a budget, you take control of where you are spending the money. You can certainly increase your expenses commensurate with your salary increase, but don’t go crazy.

Pay yourself first: This maybe the most important key in increasing savings. Take 10-15% of your income and put it into savings. If you get a raise or a bonus, do the same thing. Just like you pay for other expenses by setting up an automatic payment, automate this as well. Just have it automatically transferred into savings and then a few times a year when you have saved enough money, invest it.

Set goals: Write down short- and long-term goals. You don’t need to accomplish everything in one day. Let’s say you need a new refrigerator. Go ahead and buy it, but don’t use it as an excuse to buy all new kitchen appliances. Stick to the plan and cross out your goals as you achieve them.

The extra money you are now earning is a blessing. Use it wisely and you can have your cake and eat it too. There is no reason that you can’t go to the occasional fancy restaurant, and also secure your financial future.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.