How to Avoid the silent wealth killer... Lifestyle Creep

In this episode of the Retire Early Retire Now podcast, host Hunter Kelly, addresses the topic of lifestyle creep—the gradual increase in spending as income increases, particularly affecting high-income earners. He explores how to identify lifestyle creep, its detrimental long-term effects on financial goals, and practical strategies to mitigate it. Suggestions include setting clear financial goals, automating savings, practicing mindful spending, avoiding debt, and revisiting financial plans periodically. The episode underscores the importance of aligning spending with long-term financial objectives to prevent lifestyle creep from undermining financial independence.

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Transcript

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And welcome to the retire early retire now podcast. I'm your host hunter Kelly owner of Palm valley wealth management. And today we're going to talk about the silent wealth killer and that is lifestyle creep. high-income earners get affected by this the most. So we'll go ahead. today and talk about what lifestyle creep is, how to identify it. And then it's ways that we can mitigate that. So we can ensure that we'll continue to meet our longterm financial savings and investing goals. before we jump in, go ahead and smash that subscribe or follow button on your favorite podcasting app. I'd love to continue to grow this podcast and share this with a friend, because I think this one. We'll be very practical to, uh, most of your friends that are listening. Cause lifestyle creep. this is something that affects just about everybody. And again, it's the silent killer. Most people don't even realize it's happening. have them listen to this podcast. and just make them aware because the more you are aware of it, more we measure it. The more likely are to adjust and fix it and continue on where to those savings and investing goals. Let's hop right in. What is lifestyle creep. And so lifestyle creep really occurs as, especially in maybe a younger professionals live where. There they've gotten into their career. Maybe they're been in there for three, four or five years, and they're starting to get to the point where their income is jumping significantly. So this could be a resident going to. an attending physician type, scenario. Or, an associate attorney going to partnership or you're working in a large corporation and you start working up into the upper management roles and income is creasing quite rapidly. And as this happens, your expenses. So the percentage of what you're purchasing and spending money on. Or increase more than what you're saving. people do this without realizing it because they have more disposable income. Ah, just got a$10,000 raise$20,000 raise. Whatever the case is, and they will start to spend more and becomes more normal, but they haven't really adjusted their savings rate. To continue to be able to meet. those new normal needs later on down the road, or if it's even a more short-term goal of maybe purchasing a home or some sort of large purchase, Again, they're straining their ability to be able to save and invest because the percentage of their expenditures. Are starting to increase. this can be detrimental, especially over the longterm. Because in a given year, you may not feel it. Ah, we just have a more expensive year. but as you continue to do that again, it becomes more and more normal. generally when I see clients and just people around me. Kind of in the same demographic as me. usually they're upgrading or remodeling their homes by new or more expensive cars. going on more lavish vacations, adding things like house cleaners or more expensive hobbies. and all these things are great. You're working your tail off to increase your income. and make sure that you can do some of these things, but we also have to keep in mind. Well, I should also be increasing my savings. Because maybe I have a long-term goal of retiring early or paying for my kid's college or, having a vacation, home, whatever those things are. And if you let these kind of. Immediate things start to take over. They start to stack up and compound. Whereas some of this money could be going to those longterm. investing goals as long and as well, if you plan it right, doing some of these, I call it cost of living adjustments. as you increase your income as well. some of the longterm, again, some of the longterm consequences of this. it makes it more difficult to save and your savings rate will theoretically decrease over time because you're spending more money as you increase your. your income, but you're not increasing your savings. Right? if you have goals to retire early, less than your hours, have a stay-at-home spouse, for a lot of people that are having kids, this can impede on the ability to do that because let's say you're used to that dual income. you haven't had kids yet. You just got married. You get married for a handful of years. Both of you, you're making a healthy living. and as your increases have happened, you continue to increase your lifestyle. Well, if your goal was to have one of the spouses stay home, when you have a kid for a handful of years or whatever, that may be. Well, maybe some of that increase in income over that time. Could have helped that happen. and maybe because you spent more and you have a more lavish lifestyle, you're not able to do that. And so you're not able to reach that goal. So these are some things that you should think about as you start to get a higher income. How do I want to treat this income as it going all to expenditures? Do we need to add more to savings? How is that going to affect my longterm? retirement goals. Because if I'm used to spending a$200,000 a year, And I'm only saving enough to, supplement maybe a hundred thousand dollars a year through my IRAs and savings accounts, things of that nature. Well, then there's a, there's a misalignment there, right? So let's recognize or let's talk about how to identify, triggers of lifestyle creep. Right? So a lot of times it has to do with social comparison. So think of. people saying, like keeping up with the Joneses Jones's right. So you have friends, they go out and then go on lavish vacations or they're remodeling their homes or buying boats or doing whatever they do. And. And you want to participate in that? And that's great. you should certainly consider doing that and have fun and live your life, but also we need to consider, okay, well, if my friend Johnny down the street just went and bought. a hundred thousand dollar car. How does that. And I liked that car. Maybe I want that car. How does that. fit into my situation. Can I realistically purchase this? And still be able to retire early things of that nature or whatever. Be able to save and invest in meet whatever those goals are in the future. The other big one that I see, to identify lifestyle creep is, emotional spending. just. A lot of people use this analogy. But, when you buy. And when you purchase a new car, right? You have that great feeling. just got a new truck or I got. this new car that I've wanted for a long time, you're driving around. It's been two days. And then that. For lack of better terms that dopamine kind of wears off. And it's like, oh, well now I kind of want that, that newer truck a year down the road. And that newer truck the next year and so on and so forth. Right. So we have to really decide. think about, is this an emotional purchase? Is this. something that I just want, randomly, or is this something that I've planned for? And there's a reason I need it and that the reason candy, cause you want it right. And you can afford it. Sometimes it may be necessary for your job or whatever. But is, is this an emotional, this is just something I want. Impulsively or is it something else? Right? And so as your income increases, I will say again, I don't want to seem like, Hey, you should save every, every bit of increase you've ever gotten on your income. I'm not saying that, you should certainly reward yourself, especially if your, your grads are graduating residency and, and you get that first big job that you've always wanted or. At a certain hospital or you make partnership or, You start a business and it's doing really well, whatever that is. You should certainly reward yourself, but also don't spend every dime of it. Right. as the old saying goes, don't spend all one spot, because there's longterm ramifications of. doing that and it may, you may not fill it in the moment. But again, it may push back your retirement, or it may not allow you to buy that home or find your kid's college or whatever it is, right. the other thing, and this is within the last probably five to 10 years. Is the subscriptions. Right? if you're my agent. in my mid thirties. you probably remember growing up and only having cable TV, right. Um, and as table K O T V got better and satellite TV and all that. You had, your Brandom. Local channels, ESPN, things of that nature. and then you had to buy basically a thousand channels to get one thing. What would the scripts subscriptions? It's, it's a lot more customizable, right. I can do Hulu or YouTube TV or. streaming with Netflix or, There's all different kinds of things. Right. It's great, but it's also kind of a double-edged sword because you subscribed to this thing and that thing and this thing and that thing. And now it's hundreds of dollars. Whereas the cable TV that you cut two years ago was maybe only a hundred,$150 a month. Right? and so keeping, Tabs on your gym, memberships, your streaming services, any, any sort of reoccurring subscription that you have that you don't use, you should cut those. Because again, that will add up over time. And this isn't like a. Starbucks every so often that all, all. Everybody talks about, oh, don't, don't drink coffee out all the time. Cause you're going to be broke. No. This, this is stuff that is reoccurring every month. Can can be hundreds or thousands of dollars. So make sure you're keeping. Tabs on that. And there are plenty of services out there. You can just Google them and they'll actually go find the subscriptions for you, and cancel them. If that's something that you want to do. so I would certainly recommend that. And again, your income has created increasing and you're like, oh, I can afford the$5 a month,$10 a month. This.$150 gym membership that I never go to anymore. things of that nature. And so you just want to be cognizant of those subscriptions and habits that that can accumulate over time. each individual purchase again is not. Necessarily that expensive, but as you add those up. They certainly. Do you become more expensive? So, So let's jump into some. some strategies that I've kind of alluded to, to kind of mitigate these. This lifestyle creep, right? Again, this is something that I deal with personally. as my income has increased. And most of my clients as well, right? If they're, they're still in their working years or they're in their part of their career where their income is increasing. pretty significantly every handful of years. they are also dealing with this. Hey. I used to make 150. Now I'm making two 50. I really want to be able to increase my life because I've been working hard. but we also have to consider what is that going to do in the longterm? Right. Again, I'm not saying we should save everything that we, get as far as increases, but we want to be mindful. I talked about this a little bit last week, as far as balancing short-term versus long-term goals. but the first thing I would do is just set clear financial goals, have that conversation with your spouse. or yourself, if you're not married and really dive into what are my values of what I want to do. I don't want to accomplish it and write these things down. Create a plan and stay focused on that plan. What this is going to do is if I know I have a specific savings goal. Or some sort of goal down the road that is going to. That is going to. call for saving or investing. Then I know as I get these income increases, then I can start funding those more rapidly. And maybe I can meet those quicker, those goals quicker. Or in the, the other side is if my income is increasing, I need to make sure that I can continue to replace this new income. So I need to increase that savings for. Later on down the road. The next thing again, something I talk about last week, automate your savings. So 401ks and retirement plans through your employers. This, this is probably the easiest way to do it. if you set your, your savings at 10% or 20% or whatever as your income increases, you're going to keep that savings at that 20%, right? It's not generally not a dollar value that you're putting towards your 401k. Where it becomes a little bit more difficult. Is those things like your Roth IRA, your brokerage accounts, your savings accounts. You do have to revisit those every so often. To say, okay, am I still saving enough? Is my savings rate proper to, what I need. To meet those more long-term goals. generally. I advise people will use again, the pay yourself first. budgeting method. to prioritize those goals first and anything left over at that point, right? Then you have walking around money and this is perfect to avoid lifestyle creep. Right. So again, I have, I've made my clear set of goals. I got a nice big bonus or I switched jobs and they're paying me more. Whatever the case is, and now I can go, okay, well, do I want to meet this goal? before. Kind of my, my due date on this, or do I want to put more money to spending in my still on track? things of that nature. Doing the pay yourself first method. Always prioritizes those goals that we need to save and invest for, first and then anything left over. We can always do with what we want with it, whether that's, increase our lifestyle a little bit or meet those goals a little bit quicker. one thing. that I like to utilize. because I can be an impulse spender. myself. sometimes, and that is, just be mindful with your spending. So practice what I call the 30 day rule. So everybody's, situation's a little bit different. So if there's a creative threshold, right. Um, purchase amount. So if that's a hundred bucks, if that's a thousand bucks, so that's 10,000 bucks. Whatever your, your situation calls for. Create a. 30 day rule. Right. So. Uh, if there is a purchase that I want to make, that's over a thousand dollars. Well, then I need to wait 30 days so that I'm not making an impulsive. decision, on buying this particular thing, whether I need it or want it, whatever the case may be. Right. and so the reason why I say everybody's situation is different because if I'm making. A million dollars a year, a thousand dollar purchase is probably not going to move the needle on my situation much, but if I'm making.$50,000 a year. And, and I'm struggling to save what I need to save. Then a thousand dollar expenditure would be a big deal, right? so use your situation wisely, create some sort of threshold there. And say, Hey, if this over this amount, I need to wait 30 days to really say, do I really need it? can I use it? Do I have the funds to really purchase it? Things of that nature. The next thing is to avoid debt, right? It's easy as you income or increase your income. to take on more debt cause I can. I can. pay this bigger house note or this bear car note. and things of that nature, but the biggest determining factor or one of the biggest determining factors to become wealthy is to avoid debt. So stay away from credit cards. Don't get over your skis with. with. mortgage payments or car loans. Things of that nature. because this really, eat away at your wealth and, again, that would create some. some. amount of lifestyle creep, because now you're, you're kind of stuck into, these payments for a given point in time or a given amount of time. until they're paid off. And so if it's a house that could be 30 years. If it's a car loan I've seen. Six seven years. which is crazy to me, but, but people do it. And again, it eats away at their wealth because they're paying the bank. Where they're just trying to make up his payment for appreciation it, depreciating asset, on, on this car and things of that nature. So. really, try your best to avoid debt. And as your income increases, if you have accumulated debt over that time, use that extra income to. Get rid of that debt or at least slow the bleeding of adding more debt on, cause it'll go a long way to. building your wealth over time. And then lastly, you need to revisit your plan periodically. I would say at the very least once a year, if not more, I like to meet with my clients two, three times a year, so that we can revisit. And, make sure there's no, no changes that we need to adjust for. And so if this is something that is difficult for you, whether that's making the plan, developing the plan, having the right strategies, or just being accountable to the plan. You know yourself. If I get a big raise, I'm going to go spend it. I just need some accountability. hiring a financial advisor would be a great choice because even if you're paying them some amount of money, if they can help you stay on track. and meet your goals in a timely manner or create some strategies to help you. Reach those goals quicker than you. would, right. that would make a lot of sense. So, revisit those financial plans pretty regularly. And then also, if you just need extra expertise, help there, if there's just stuff you don't know what you don't know, then. hiring somebody. And that's exactly what we do at Palm valley wealth management. So you can always give our website, look. At Palm valley awm.com. you can go our process page, see how it worked with clients, and schedule a 15 minute call to see if it's something you want to do. but again, revisiting those financial plans. it's probably one of the more key things here. and please. Keeping those goals, fresh top of mind. to, to reaching those. And as you. look at that plan. You'll know. Okay, well, next time I get this big increase in pay. this is where I'm putting the money. Right. just think about that along the way. just a couple things kind of check, just to recap and Some actual items you can do to kind of reach your goals and avoid a lifestyle creep again. Find your values, write down some goals, stick to those goals. visit those goals. periodically, I would say at least once a year, if not more. Adjust your budget as your income increases. Right? the pay yourself first method is something that I've found that works the best for me and my clients. it doesn't work best for everybody. have those goals in mind first when you have those increases. An income. so that, you're not forgetting about them and that lifestyle creep will creep up and making this a goal. and then. and then if you need help. Hire a professional, get, get a financial advisor to. Get you accountability, maybe give you a more advanced help. if your situation calls for. It's investing help or tax help, whatever that is, get with a financial advisor. so that will wrap it up for today. I appreciate it. Hopefully this is helpful. Lifestyle creep is a lot more common than most people think. even, myself as my income has increased over the last couple years. it is. It's difficult to, not go ahead and spend it. because you work hard for it. But you have to have those long-term goals in mind. if you want to be able to accomplish them. get the help that you need. Get those plans. created and, don't let that lifestyle creep your road, your financial independence. And we'll see you in the next one. This podcast is for educational purposes only. It is not meant to be financial or investment advice. Do you not make decisions solely based on this podcast, please seek a financial legal or tax. Professional. Before making these considerations, please keep Palm valley wealth management in mind when making those considerations.