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The #1 Thing That Prevents People from Reaching Financial Goals

It doesn’t matter if someone is trying to pay off debt, save money, or prepare for retirement. 

There is one thing across the board that prevents people from reaching financial goals and achieving financial freedom.

Here’s what typically happens: you get a raise, so you buy a new house or car. 

Or you take on a side hustle, and then spend that money on a new TV, stuff for the house – you name it. 

Economists refer to this phenomenon as “lifestyle creep.”

It’s a creep, alright.

It sneaks in and, before you know it, reaching your financial goals seems just as far away as it was when you were earning less. 

If your lifestyle continues to creep toward a higher cost of living, it’ll be just as hard (or harder) for you to find financial freedom.

What Is Lifestyle Creep

Lifestyle creep

Lifestyle creep is also known as lifestyle inflation.

Lifestyle creep works just as it sounds – it creeps up slowly without you even realizing you are succumbing to its temptations.

According to Investopedia, “Lifestyle creep occurs when an individual’s standard of living improves as their discretionary income rises and former luxuries become new necessities. The rise in discretionary income can happen either through an increase in income or decrease in costs.”

As people have more discretionary income, they tend to spend more money.

For example, someone may get a raise and start buying pricier goods.

Or, someone may move to a town with a lower cost of living and use the decrease in rent to live a bit larger.

When you look at it this way, it doesn’t necessarily seem so bad.

We work hard to earn a paycheck. If we earn a raise that can improve our quality of life, shouldn’t we take advantage of it? 

The truth is that people have trouble recognizing when lifestyle creep is happening until it has stopped them from reaching financial goals.

How Lifestyle Creep Keeps People from Reaching Financial Goals

extravagant habits

Investopedia explains, “Lifestyle creep can start small – ordering a more expensive bottle of wine at dinner, or buying a bag or electronic item you do not really need – but can quickly extend to more extravagant habits.”

The problem with lifestyle creep is that it assumes we will always have the same amount of money coming in – and that is not always the case.

Rather than seeing the opportunity to put a raise toward reaching financial goals, people put the “extra” money toward an upgraded lifestyle. 

As a result, the amount of a paycheck controls a person’s financial freedom.

We stay in debt. We don’t save enough for emergencies. We don’t plan for retirement.

How to Avoid Lifestyle Creep and Achieve Financial Freedom

financial freedom

Who hasn’t celebrated a raise with a nice bottle of champagne or an upgraded plane ticket?

It only becomes an issue when you don’t try to stop it. Fortunately, not everyone falls victim to lifestyle creep.

Keep reading for 5 ways to avoid falling victim to lifestyle creep.

#1 Keep a Budget & Maintain Savings Goals

keeping a budget The importance of keeping a budget cannot be overstated.

A budget is the number one way to prevent lifestyle creep from taking over your finances.

Everyone should use a budget to track expenses, savings goals, and discretionary income.

When you receive a raise, the raise should be noted in the budget.

However, the budget should not change drastically. The same percentages should remain in place if you want to get ahead and achieve financial freedom.

For example, if you put the recommended 20% toward savings with every paycheck, you should continue to put at least this same percentage toward saving. 

If you put 20% of a $4,000 paycheck toward savings, you save $800 a month. 

Now, let’s say you get a raise to $4,500 a month. Then, you would save 20%, or $900 a month.

Or don’t touch your budget at all. Live within the same budget you had before your raise.

Take all that is “on top” and put it toward reaching financial goals. 

#2 Differentiate between Needs and Wants

wants vs needsCelebrating a raise with a fancy dinner is understandable.

However, going from cooking at home to eating at 5-star restaurants regularly is not.

You can tell lifestyle creep has become an issue when you start to think luxuries are necessities. 

To avoid lifestyle creep, you must recognize that, just because you can afford something, doesn’t mean you need it.

Here are some examples to show how easily we confuse needs and wants:

  • Paying daily for fancy coffee at a drive-thru
  • Hiring someone to clean or shop
  • Buying designer clothing
  • Subscribing to multiple streaming services

These are just small expenses. But lifestyle creep starts small. Then, it grows into believing we need a luxury car. 

#3 Put the Overflow toward Reaching Financial Goals

Financial GoalsA major perk of avoiding lifestyle creep is reaching financial freedom earlier.

Imagine how much sooner you could retire if you lived on your original budget and, instead, put all the money from wage increases toward paying down debt and saving for retirement.

This is what many people who have retired early did.

They understood the difference between wants and needs and stuck to the budget they created based on needs.

Everything “extra” went toward reaching financial goals, such as early retirement. 

#4 Plan for Wage Increases

Wage IncreasesPutting the “extra” away is easier said than done. That’s why it is important to plan for wage increases.

In an ideal world, you can anticipate getting a raise or knowing exactly how much more money your new side hustle will bring in. 

But we don’t live in that world so it’s important to prepare ahead of time for how you will handle a wage increase.

Likewise, if you receive a job promotion or change jobs and receive a wage increase, you need to make a plan.

If you simply accept the wage increase without planning for savings, you will spend it.

#5 Make Sure Side Hustle Income Only Goes toward Reaching Financial Goals

Side Hustle IncomeMost people start side hustles for the sole purpose of reaching financial goals, such as getting out of debt, paying off student loans, or saving.

Unfortunately, some side hustlers make the mistake of thinking they have a little extra money, so they can spend a little more than usual.

This is the start of the slippery slope of lifestyle creep.

If side hustlers treat their side hustles as expendable income, then they will not achieve these goals. 

Instead, 100% of your side hustle income should go directly toward financial goals.

What Happens to Financial Freedom When People Don’t See Lifestyle Creep

hope for retirement

According to Investopedia, “62% of workers expect their standard of living to stay the same or increase in retirement.” 

Moreover, “Six out of 10 workers say they feel confident or somewhat confident about being able to enjoy the kind of retirement they want.”

Here’s the thing – this is what these people hope for their retirement.

If they have not saved and give in to lifestyle creep during their working years, they may be surprised to find they cannot live the way they have grown accustomed to.

In contrast, those who are aware of lifestyle creep will make adjustments to their budget and savings goals to ensure their lifestyle doesn’t change drastically when they retire.

While retirement is a clear example, lifestyle creep can hurt people at all stages of life. 

If you lost a job or suffered from a pandemic-related pay cut, you may have already seen how lifestyle creep affected you financially.

 

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