Outline:

  • Capture the extra money coming through the door;
  • Automate investing, not spending;
  • Escalate early;
  • Make gradual lifestyle changes.

Lifestyle creep is where you spend more money because you’re earning more money.

It’s as simple as splurging more regularly on designer frocks or expensive wine or frequent phone upgrades or snazzier birthday gifts or nicer hotels or front row concert tickets…

Each of those things individually doesn’t seem harmful, especially as you earn a little bit more.

In fact, using your money for those kinds of things is wonderful!  

But the problem is, this kind of incremental increased spending unintentionally resets your lifestyle expectations and therefore your baseline. Your baseline is what your lifestyle costs.

Of course, some inflation in your lifestyle isn’t a bad thing, particularly if you’re committing to a “buy more quality over quantity” idea.

But once you’ve adjusted to a more luxurious lifestyle, it’s particularly tricky to wind it back.

Start early, when the pay rises happen.

Research done in the United States shows we generally get more pay rises earlier in our working career. (The Australian Bureau of Statistics calls this “inflation-adjusted wage growth”).

Did you know, in 2017 the average Australian worker received a pay rise of nearly $1,900, lifting the annual wage to $81,619?

That's a 2.4% pay increase but once adjusted for inflation (which is how much stuff costs in our economy) it's a rise of just 0.5%.

So even though our wages aren’t growing tremendously at the moment, that little bit of wage growth generally occurs earlier in our lives. When we hit mid-career, this wage growth levels off before peaking in your 50s.

If you’re managing to boost the amount of money coming through the door through a pay rise, there’s an easy way to capture that money, rather than watch it evaporate before you’ve really put it to work.

Automate investing. Don't automate spending.

Relying on your own mental effort isn’t always the best way to build a habit. So letting the robots do the hard work and thinking is helpful.

Automating your finances from paying bills to making recurring investments is easier than ever. Almost every banking institution allows you to establish this kind of repetitive bill paying and Spaceship has made it simple to automate repetitive investments.

Indeed, once you’ve managed to set up recurring payments and investments, and you’ve given yourself the happy little pool of money that you can spend however else you like, you’ll be surprised at how quickly you’ll adjust to your financial situation.

The problem is, once you’ve set this up and you suddenly get a pay rise, then the door is open for lifestyle creep to come knocking.

If you keep the same financial situation and the same bills or investments are automated, but that happy little pool of daily spending money grows larger, you can bet you won’t manage to keep much extra from your new pay cheque.

Automatic escalation.

Setting up automatic escalation requires a little more legwork depending on where your savings are going.

Firstly, the minute you get the pay rise, re-distribute your automatic savings and investment payments to reflect the pay rise.  For example, if you get a 10% increase in pay (and your rent and bills are staying the same), then you can allocate that extra 10% to your savings and investment payments. Maybe even try for more!

Suggestion: Maybe actively avoid increasing your rent by unnecessarily moving to a swish new pad! It might feel like the natural thing to do if you get a pay rise, but the difference in savings could make quite a difference for your financial goals!

We also recommend setting up a calendar alert on January 1 of every year with detailed instructions of how you plan to increase your savings or build your wealth that year.

While you’ve got an automated system humming along nicely, make sure you’re redirecting any extra money into helpful places, rather than just giving yourself a lifestyle boost.

Make gradual changes.

Of course, if you’ve finally got a pay bump, the urge to replace the milk crates you use as furniture is probably fairly strong. But resist the urge to head to IKEA and swap your new dollars for trendy lampshades and unpronounceable bath mats.

Instead, focus on the things that really matter to you and your life will substantially improve. If your mattress is sagging and terrible, maybe invest in a new one. If your fridge is leaking, maybe it’s time for an upgrade.

But approach your asset acquisitions gradually and you’ll manage to resist the lifestyle creep that comes with a flood of shiny new things.  

This applies to clothing and electronics too. Carefully considering your purchases will allow you to leverage the growth engines at your disposal - like investing in shares or your own education.