As you grow in your profession and career, your earnings increase. And so do your lifestyle-related expenses. The thing about lifestyle-related expenses is that they are often unnoticeable; in other words, they creep up on you, because of which they are often hard to control. For e.g. Watching Movies in mall at PVR & INOX is new Normal.
This quiet, gradual increase in lifestyle-related expenses is known as ‘lifestyle creep.’ If not dealt with, it can prove very costly and derail you life goals.
Lifestyle expenses are sticky; they are difficult to mend in.Shopping for clothes in big chain stores at Malls is to do thing, Kids take this as benchmark and we hardly can change it.
With each new buys or indulgence, it becomes a standard. We try to go upward the spiral for the stuff we buy or things we enjoy doing. There is nothing wrong with living better. After all, when you are making more money, it’s okay to enjoy life a little more. Ultimately you should be enjoying wealth.
But finally question comes, how to strike balance? If your income Jumps in 2-3 multiples in short span, what will you do? Unless you are cognizant of where you are spending, you will not have control on Money inflows and outflows.
How to tackle it?
The first thing to do is to accept that these additional lifestyle-related expenses are part of moving up in life and that one must find a way to invest judiciously and deal with it.
Many of our clients diligently increase their monthly investments every year at the time of review. They ensure that they invest a percentage (say 35% to 40%) of their monthly income, rather than a fixed amount per month. The ‘percentage method’ ensures that your invested amount keeps pace with your earnings. This is a smart way to invest and manage lifestyle creep.
Revisit your rate of savings every year. This will help you keep pace with inflation and invest in sync with the growth in your income. As your income goes up, the general rule of thumb is to keep your expenses steady. Live as far below your means as you can. Instead of increasing costs, you increase savings and investment contributions.
Make the right choice with your cash flow. How to do this? You need to know why you’d save or invest to begin with. What are your short- and long-term savings goals? Are they more important than this choice you’re about to make that would significantly impact your normal expenses? Once you understand your priorities and clearly see what you need to save, it’s much easier to decide how much you can comfortably spend.
To summarize, this is not rocket science. Actually, it can be distilled to a simple three step formula.
1. Put down Income and expenses for the previous year
2. See the proportion of Income to expenses, savings and EMIs – the thumb rule is that each one should not exceed 33% of income. But it varies case to case if Income proportion is high.
3. Take action to balance it.
Remember not all lifestyle expenses are ‘bad’ When you carefully manage it and deliberately choose to increase a specific expense on occasion, you can get more out of your life today while still planning responsibly for tomorrow. When you work on the different steps you can (and must take) to best ‘lifestyle creep’ with a prudent financial advisor you trust, you can be sure it will go beyond being something that’s easier said than done.
One thought on “Lifestyle creep and how to handle it ?”
Nice & informative article