Imagine you get a big raise at work or a new job with better pay. As your income reaches a new higher level, what might your instinct be on how to spend it?
Maybe you want to move into a bigger place or drive a better car. Perhaps your wardrobe needs an upgrade, or you hope to replace some worn-out furniture.
None of these are by any means wrong, and may be necessary; however, they are also examples of lifestyle creep.
As income increases, it’s natural for your spending to increase as well. This is known as lifestyle creep when your expenses continually rise at the same pace as your income. In some ways, this is a necessary part of life. As income increases over time, many other aspects of your life may also be changing, and significant life steps like having kids or moving will require money investments.
The problem occurs when lifestyle creep gets in the way of making wise financial choices and ultimately interferes with your financial health.
If your spending increases in step with your income, or even worse, exceeds it, then it will not be possible to have a balanced financial plan.
An essential piece to financial health is being prepared for the future and any emergency expenses. Having a comfortable amount of savings on hand provides financial insurance against the unexpected. Saving for retirement or a child’s college fund is an investment in long-term financial security.
Bonuses, raises, or higher income from a new job are opportunities to enhance financial wellness if used wisely.