On more than one occasion, someone will reach out to my wife or me, asking if one of our 3 daughters can babysit. We’ll send out a message on the family WhatsApp group to see who is available. Usually, at least 2 of the 3 are busy, so it makes it easy to send one to babysit. But sometimes they are all free, and that’s when the fun starts.
They all chime in on how they need money. The younger one will say that she wants to get the job because she “really needs money”. Then the older one said, “You need money? For what? I am the one who really needs money because I have big expenses”. To which I quip, “Big expenses, huh? Planning on starting to pay a bit of rent?” Not to be outdone, the middle one explains how she truly has the biggest expenses, to which I’ll make a comment about paying for gas when she takes my car.
While I’m happy that the girls were all trying to earn money to pay for things that they “need,” I was a little upset that all they wanted to do was use their money and buy things, instead of saving a bit.
The trap that I hope they don’t fall into is one that, unfortunately, catches many adults. How many of you get a raise at work and then complain that you still struggle to finish the month in the plus, let alone have nothing left to save and build wealth? If you are one of those, don’t feel bad. You are part of a very large group of people who have gotten caught in “lifestyle creep”.
What’s ‘lifestyle creep?
Dr. Kevin Nguyen, writing on whitecoatinvestor.com, defines lifestyle creep as “the slow but steady changes in a person’s spending habits and standard of living. Just received a raise? Go buy a new pair of shoes. Year-end bonus? Go put money down for that car. Graduated from residency? Go buy a new house, new clothes, and finally start living. Certainly, it’s not wrong to want to do these things, but lifestyle creep can damage your long-term financial goals and should make anyone suspicious of their spending habits.
The danger of lifestyle creep is that it often goes unnoticed. You may start off by rationalizing small purchases. By themselves, it may seem like nominal increases to your standard of living, but together, this can add up dramatically, and slowly, your lifestyle has changed. A higher lifestyle brings higher expenses, and failure to address this can lead to lost opportunities for saving and investing in your future.”
As I have mentioned in the past, years ago, I met with a successful woman who had just been hired as a consultant and was traveling the world and making a lot of money. She was complaining that just after a few months of earning a salary that was triple what she had been making previously, she had put nothing in savings and was uncomfortable with her money situation.
We came up with a plan to allow her to increase her lifestyle but plan for a secure financial future. After the plan, I never heard from her again, other than seeing some occasional social media posts of vacations in faraway lands, dining in fancy European restaurants, which indicated that she was really living the good life. It was like she was starring in a Visa Credit Card commercial! A few years after our meeting, she surfaced and wanted to meet. She told me that after making all that money over the years, she was embarrassed that she had banked virtually nothing and now wanted to get serious.
‘Who is rich? He who is happy with his portion’
In Ethics of the Fathers 4:1, Ben Zoma teaches, “Who is rich? He who is happy with his portion.” The Mishnah is not advocating complacency. Rather, it reminds us that true wealth is not measured solely by what we earn, but by our ability to appreciate what we already have. When every increase in income creates a desire for an even higher standard of living, satisfaction remains elusive.
Financial freedom is rarely built through dramatic gestures. More often, it is achieved through small, disciplined decisions repeated over many years. The ability to resist lifestyle creep may not be glamorous, but it is one of the most powerful wealth-building tools available.
Here are some tips that will help you both increase your standard of living and long-term savings.
Budget- Take control over your spending. Track income and expenses, and then you can start a realistic savings plan and start building wealth. By actually creating a budget, you take control of where you are spending the money. You can certainly increase your expenses commensurate with your salary increase, but don’t go crazy.
Pay yourself first- This may be the most important key to increasing savings. Take 10-15% of your income and put it into savings. If you get a raise or a bonus, do the same thing. Just like you pay for other expenses by setting up an automatic payment, automate this as well. Just have it automatically transferred into savings, and then a few times a year, when you have saved enough money, invest it.
Set goals- Write down short- and long-term goals. You don’t need to accomplish everything in one day. Let’s say you need a new refrigerator. Go ahead and buy it, but don’t use it as an excuse to buy all new kitchen appliances. Stick to the plan and cross out your goals as you achieve them.
The extra money you are now earning is a blessing. Use it wisely, and you can have your cake and eat it too. There is no reason that you can’t go to the occasional fancy restaurant and also secure your financial future.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates. Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
