How to prevent lifestyle creep from derailing your investing and retirement goals

Whether you’ve just landed a new, higher paying job or you recently received a big bonus at work, earning more money often leads to spending more money.

It’s not always intentional. In fact, a gradual increase in spending often happens over a period of months or years. You start eating out more, and at better restaurants. You get your hair styled every three months instead of once a year. You ditch your used (but paid-off) car for a new one with a large monthly payment.

Before you know it you’ve fallen victim to lifestyle creep, and if left unchecked, this behavior can unravel your retirement and investing plans.

In this article, we’ll explain lifestyle creep, life events that can trigger it and how to stay on-track for your future.

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What is lifestyle creep?

Lifestyle creep, also known as lifestyle inflation, happens when spending gradually increases as income rises. It’s a sneaky yet common phenomenon that can derail your long-term financial goals, like saving for retirement or bolstering your portfolio.

It’s natural to want to spend more as you earn more. You’ve worked hard for your money, so it makes sense to want to enjoy the fruits of your labor.

But while splurging here and there may not feel like it’s hitting your bottom line much, you might be saving and investing less than you realize — especially if it’s been a while since you took a hard look at your budget.

“We need to always be cognizant of what our financial purpose is and why money matters to us, and compare that with how we are spending our money,” says Erik Baskin, a certified financial planner and founder of Baskin Financial Planning.

Lifestyle creep comes in the form of both major luxuries and modest indulgences. Some life events that might trigger lifestyle creep include:

• A raise or promotion
• Bonus or inheritance
• Starting your first high-paying job
• Combining finances or moving in with a partner
• Paying off student loans
• Moving to a more expensive neighborhood

How lifestyle creep can derail your investing and retirement goals

Mild to moderate lifestyle creep might mean eating out more or going to a concert every other month instead of twice a year. But if you don’t realign your financial priorities with your higher salary, you’re bound to lose track of how much you’re really saving and spending.

That’s not the only pitfall. Lifestyle creep comes with other long-term costs that can impact your investing and retirement goals.

Diminished savings

If you’re spending most of what you earn, a sudden job loss can be devastating, especially if your emergency fund is small. You might be forced to take an early withdrawal from your IRA, owing a 10% penalty plus income tax in the process. Not only are you raiding funds earmarked for the future, you’re also racking up a hefty bill when tax season arrives.

Missed retirement savings opportunities

Starting at age 50, annual IRA and 401(k) contribution limits increase. The federal government provides this “catch-up” savings opportunity because older workers often need to boost their contributions to reach ever-nearing retirement goals.

“You have kids, college, cars, houses, vacation and saving for retirement all happening at once.” says Baskin. “It can be a lot to handle, and most people will take the instant gratification of spending money over deferring funds to their future self.”

If lifestyle creep eats into your higher income, you’ll miss the chance to take full advantage of catch-up contributions in the final years before retirement.

Lose out on compounding interest

The sooner you can start consistently investing, the more time the power of compounding has to work its magic on your portfolio.

“Compound interest is so powerful that if you do a good job saving in your 20s and 30s, you can set yourself up so that you can afford to do everything you want in your 40s and 50s,” Baskin says.

But if you succumb to lifestyle creep, as many workers in their 20s and 30s do, then you miss out on critical years of investment growth you can never get back.

How to avoid lifestyle creep

Failing to get a grip on lifestyle inflation can make it feel impossible to get ahead, no matter how much you earn. Consider this: Nearly half of people earning $100,000 or more say they’re living paycheck-to-paycheck, according to a 2022 report by LendingClub.

Tips and strategies to help combat lifestyle creep

Save more as you earn more

If you’re making more money, your savings rate should also increase. Adjust how much you save based on what you earn.

If saving your entire raise for retirement sounds too restrictive, some experts recommend saving a percentage equal to your raise. So if you’re 35 years old, you would save 35% of your next raise. That way, you get to enjoy a little extra wiggle room in your daily budget for things like haircuts and concert tickets without neglecting your future.

Automatically bump up your 401(k) contributions

One great thing about 401(k) retirement plans is the money comes out of your paycheck before the funds ever touch your bank account. If you’re allocating 10% of your salary to your 401(k), the dollar amount you contribute will automatically rise as your salary increases.

“As humans we are horrible at managing money, so the more we can remove ourselves from making these decisions, the less we need to practice self-control and the better off we’ll be,” says Baskin.

As you earn more, bump up that contribution percentage, too. When you’re just starting out in your career, you may only be able to contribute enough to earn your company’s 401(k) match, which might be as little as 3% to 4%. But financial experts suggest contributing between 10% and 20% of your salary to your retirement account if you can afford it. Remember: Always pay yourself first.

Create a written investment policy statement

Writing your investment goals down so you can reference them later is another smart move, says Baskin.

“If you ever consider making a change to your investments, pull out this statement and review it, asking yourself if your values or goals have changed,” says Baskin.

Define specific targets for your investment and retirement accounts — such as investing $100,000 by age 35 — and consider meeting with a financial advisor after major life events to ensure you’re staying on track.

Day trading might be another temptation as you earn more, but Basin advises only making serious changes to your investments once a year.

“The less you look at them, the better off you’ll be,” he says.

Don’t blow your bonus on the latest hot stock or cryptocurrency

When you were barely making enough to survive, impulsively investing $1,000 in a hot new stock or the latest crypto coin would have seemed unthinkable. But as your income grows, you might be more willing to take risky bets with your newfound funds.

While investors are generally encouraged to invest more aggressively when they’re younger, treating your brokerage account like a casino is never a good idea.

“You can’t build a house before you put in the foundation,” says Brad Wright, a certified financial planner and managing partner at Launch Financial Planning, LLC in Andover, Massachusetts.

Diversified investments, such as an index fund or an ETF that tracks the broader market, are much more likely to net positive returns in the long-run than meme stocks and other risky investments.

“Make sure you have the basics down – a growing, well-diversified portfolio that you continually contribute to,” says Wright.

If you want to take on more risk, Wright says investors should allocate no more than 2% to 5% of their portfolio to speculative assets.

“And make sure you’re comfortable with losing the 5%, because it could happen,” he notes.

Audit your spending

Regularly reassessing and analyzing your budget is key to preventing lifestyle creep. As your income increases, it’s easy to overlook small expenses that accumulate over time. Using tools like budgeting apps to track where your money is going can help align your spending with your financial objectives.

Don’t let lifestyle creep hold you back

Just like you can’t exercise enough to compensate for bad eating habits, you can’t earn enough to compensate for bad spending habits.

If you want to get lifestyle creep out of your life, consider these financial tips.

1. Maintain a robust emergency fund: Financial experts generally recommend creating an emergency fund with three to six months worth (or more) of savings. Don’t let lifestyle creep come anywhere near your emergency fund – you’ll need that cash handy if you lose your job or face some other financial emergency.
2. Continue increasing contributions to your retirement accounts: Contributing the maximum amount to your retirement accounts is a powerful way to accelerate your savings. (In 2023, annual contribution limits  are $22,500 for 401(k)s and $6,500 for IRAs.) Take advantage of employer matches to maximize your retirement savings.
3. Consider how you can diversify your investments: Diversification is a tried-and-true strategy to protect your investments from market volatility. Spread your investments across a mix of stocks, bonds and other asset classes to reduce risk and enhance long-term returns.
4. Speak with a financial advisor: It might be worth seeking professional advice from a financial advisor to help you chart a plan for your higher salary. An advisor can help you optimize your investment portfolio, create a retirement plan and navigate complex financial decisions.

Bottom line

Preventing lifestyle creep is the linchpin to safeguarding your investment and retirement savings. Regular budget audits, automated savings and purposeful investing strategies are key to achieving long-term financial success.