The concept of lifestyle creep states that you will increase your standard of living to meet your income. The same phenomenon is found with time. If you have 3 things to do and 8 hours to complete the task, it will indeed take you 8 hours to complete it. When inertia rules the day, it is easy to fall victim to patterns that waste both money and time, through lack of attention. If you leave an extra $100 in the bank, occasions will arise that will entice you to spend the extra cash.
Here are 5 steps to help you pay closer attention to spending habits and prevent lifestyle creep from standing in the way of your financial goals.
Don’t Leave Extra Funds in Your Checking Account. The common phrase that, “money will burn a hole in your pocket,” has merit. When there are “extra” funds left in your checking account you feel like you can afford the spontaneous spending temptations that come along. This can be anything from an enticing advertisement, to an Amazon purchase. Eating out when you would ordinarily cook at home, the famous “it was on sale” argument you have with yourself, or buying another outfit or pair of shoes you definitely don’t need.
Dedicate Additional Income to a Specific Goal. Whether you want to pay down debt, save more for retirement or add to your emergency fund, earmark all income to reduce impulsive buys. When you work hard to cut expenses don’t lose the benefit by letting it sit in your account and not work towards your goals. When the money is “assigned” you are less likely to spend it on other purchases.
Increase Savings for Long Term Goals with Each Raise or Promotion. Every year that you receive a raise increase your contributions to your long term goals. For example, if you get a 3% raise then add 1% to debt reduction, 1% to retirement savings, leaving 1% for increased spending. This will help you r4each your goals faster without feeling like it’s a sacrifice. This strategy can also make up for periods of time when there is no extra income for these important goals.
Take on New Debt Cautiously. Getting a better job often comes with celebratory spending. Now that you have more income each month you might be more comfortable with a bigger mortgage or a higher car payment. However, if you are currently carrying debt high interest debt it might be a better financial decision to stay in your car and home and reduce debt or increase savings instead of living larger.
Reduce Tax Refunds. For millions of Americans tax times is celebrated because you are expecting a large refund. It is common to “buy more stuff” or pay down debt with this lump sum payment. The reality is that getting a large tax refund is essentially giving the IRS an interest free loan for the year, while you are paying upwards of 20% on credit card or other debt. Simply increasing your allowances on your withholdings form will give you an instant raise and reduce your end of year refund. Taking this additional income and earmarking it towards either debt reduction or long term savings will have it working for you all year long instead of a lump sum at tax time.
Applying these five steps to your financial strategy can reduce or eliminate lifestyle creep and help you take more control over your finances. These strategies will help you reach financial goals faster and leave more money in your pocket.