Lifestyle inflation: What it is & how to avoid it

Knowing how to create and stick to a budget is a beneficial skill for everyone. But over time, many people—of all ages and incomes—fall victim to lifestyle inflation, or “lifestyle creep,” which quickly can derail your money management.

Lifestyle inflation or lifestyle creep happens when your spending increases along with your income, sometimes so gradually you don't notice it. While getting a raise or switching to a higher-paying job is undoubtedly positive, being careless with extra income can strain your finances in the future. With a little careful planning, you can avoid lifestyle creep and retake control of your budget.

By definition, lifestyle creep comes on so gradually that you may not notice it. Here are a few signs to watch out for:

• Your income has increased, but the amount you are saving has not.
• You are living paycheck to paycheck.
• You frequently draw on savings or use credit cards to keep up with your expenses.
• It’s been a long time since you looked at your budget, or you’ve never created a budget.
• You find yourself asking, “Where did my money go?”

There's nothing wrong with rewarding yourself when you get a promotion at work or reach a milestone. In fact, it's healthy to choose specific categories of your life to splurge on as long as they align with your values and your available budget.

Lifestyle inflation can cause you to fall into debt if you're not prepared to incorporate it into your financial plan. Spending more money than you have can make it difficult to save for future goals, like starting a family, traveling and retirement.

If you're already dealing with the effects of lifestyle creep, all is not lost. You can take actions to address the problem head-on.

Here are a few things you can do:

Take a close look at your spending patterns and figure out where your money is going. Are there any areas where you can cut back and adjust? Getting back on track isn't about giving up everything. It's about increasing awareness around your spending and deciding what your financial priorities are.

When you're about to buy something new, ask yourself if it's something you really need or if you want it just because it's new. You might even keep tabs on what you do buy every month so you can know where your money went. This is a great way to see plainly if you're increasing your spending without realizing it. Creating a plan that breaks down your spending into buckets that include essentials, savings and discretionary spending also can help you automate some of your spending decisions.

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Once you have a good idea of what you're currently spending, it's time to create—or revisit—your budget. This bit of planning will help you keep track of your income and expenses so you can make sure you're spending within your means.

It may be easiest to use a budget tool, like Balance Works from Thrivent Credit Union. Start by listing all your income sources and each of your expenses.

• Does your total income cover your total expenses with money to spare?
• Or do you need more equilibrium between what you earn and what you spend?

Budgets are meant to be flexible, so shuffle the numbers around until you find an income/expenses balancing point that feels reasonable and doable to you.

Having enough in emergency savings is a cornerstone of good financial health. However, Thrivent's Consumer Financial Outlook Survey found that more than half of Americans (60%) said they would be concerned if faced with an unexpected $500 expense.

At Thrivent, we recommend holding an emergency savings account that has three to six months of living expenses as a safety net. When your income goes up, funnel the extra money to that savings account instead of upgrading your lifestyle. Then, if you ever do have a surprise expense or a drop in income, you'll have a financial cushion to fall back on and can avoid accumulating debt.

If you want to start an emergency fund, a common guideline is to break down your savings goals into manageable chunks so that it doesn't seem so daunting. For example, if you wanted to save $1,000 in three months, you could try to put away about $80 per week.

When you reach your emergency fund savings goal, you can shift to tackling other financial goals you want to focus on, like paying down debt or saving for retirement.

• Read more: Where to keep your emergency funds

If you're already in debt, make a plan to pay it down as quickly as possible. Two common methods include:

• The snowball method. Find your smallest debt and pay down the balance as quickly as possible while making minimum payments on everything else. This gives you a quick win, building a feeling of victory and momentum. You then can start putting all extra payments toward the next-smallest debt, creating a snowball effect.

• The avalanche method. Pay down the debt with the highest interest rate first while making minimum payments on other debts. Once that debt is gone, you aren't paying quite so much in interest costs, and you can start working on the debt with the next highest interest rate.

If lifestyle creep has left you with less money than you'd like, it's time to start saving. Begin by adopting the "pay yourself first" method. This approach has you put a portion of your paycheck into your savings, retirement, emergency or other goal-based savings accounts before you do anything else with it. After a month or two, you likely won't even notice this sum is "gone" from your budget. When you add to your savings immediately after you get paid, your monthly spending naturally adjusts to what's left.

Once you have a cushion built up, you'll be less likely to dip into it for nonessential purchases. A great way to build up your savings quickly is to automate the process. You usually can set up instant transfers to recur right after you get paid so a portion of your paycheck can go right into your savings. Commit to increasing the savings amount when you receive pay increases. If you pay yourself first and keep increasing your savings rate, you'll be less likely to create the spending habits that can cause lifestyle creep.

Finally, don't forget about your long-term financial goals. Knowing you have a big-picture plan can help you resist the temptation to spend unnecessarily. If, for example, you know you're saving to buy a house, it will be easier to resist spending your bonus pay on a vacation. Keep your eye on the prize and remember what's important to you.

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How to save money quickly

Most people want to save more money, but it's easy for life to push our savings goals aside. It is possible, however, to save more money in less time by creating a savings plan that is specific and measurable and challenges you to change old money behaviors.

Dive deeper

Ultimately, lifestyle inflation can catch you off guard. But now that you know more about it and how it can affect your budget, you can be more proactive going forward. Remember to set a budget that works for you and is realistic. Keep tabs on your spending habits, be mindful of new purchases, and don't live beyond your means.

And above all, don't be afraid to ask for help; Thrivent’s Money Canvas is a free on-on-one money coaching program that empowers people to build healthier day-to-day financial habits. For longer-term planning, a financial advisor can guide you and help you reach your goals for the future.