Getting a big raise? Learn how to avoid lifestyle creep

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Hanna Horvath, CFP®Managing Editor & Certified Financial Planner™Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

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It’s nice to be rewarded for hard work with a raise. And it can be tempting to spend more money now that your paychecks are fatter.

But this can lead to lifestyle creep.

“As our income goes up, it’s easy to justify spending a little extra money,” said Jessica Goedtel, certified financial planner at Valley National Financial Advisors. “Quickly though, that little bit becomes a lot, and next thing you know, you’ve spent your pay increase with nothing to show for it.”

When you begin earning more, it’s natural to want to treat yourself. But this feeling of deserving more can escalate quickly.

If you get used to nicer clothes, vacations and the newest iPhone, you’ll always want the latest and greatest, even if your income doesn't keep up, said Mackenzie Richards, certified financial planner at Bank Rhode Island Investment Services. This is known as lifestyle creep.

How common is lifestyle creep?

“Lifestyle creep is the norm, not the exception,” said James Dahle, practicing emergency room physician and author of The White Coat Investor, a blog dedicated to teaching personal finance to physicians.

In most careers, income plateaus at a certain level, he said. Continue to increase your expenses and you could find yourself in debt. Getting a handle on your expenses early will help you avoid running into money troubles down the road.

“It’s OK to have a little greed. Just don’t let it explode into a habit,” Dahle said. “Everyone could probably spend their entire income if they wanted to.”

How to avoid lifestyle creep

The easiest way to avoid lifestyle creep is to pay yourself first. Put your raise toward any debts you may have, including credit card debt or student loans. If those are paid off, have the extra cash automatically go into savings instead of your checking account. Consider increasing the amount you’re contributing to your 401(k).

While cutting smaller purchases may help you save some money, it’s the larger money moves, like buying a house or car, that move the needle on your finances.

“We have limited willpower,” said Dahle. “So just focus what willpower you have on the bigger things.”

Make a budget and stick to it. Prepare for any future planned expenses, like child care, buying a home or vacations.

Review the budget and track your expenses regularly. You can use a budgeting app or this downloadable budgeting spreadsheet. Adjust your budget when needed.

Lastly, consider your future self.

“While our culture unfortunately prioritizes having the latest and greatest, take a mental break from this rat race to really think about what you want,” said Richards.

Have clarity on your values and think about what’s important to you, said Liz Revenko, certified financial planner and advisor at Private Ocean. Decide what’s worth spending on today versus saving for tomorrow.

“If having a safe retirement is important to you, in that moment when you are about to whip out your credit card, pause,” she said. “Ask yourself, ‘Is this more important than feeling safe?’ And listen to the answer.”

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