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Many financial experts warn about lifestyle creep, but Sethi believes there’s nothing wrong with it. Read on to find out why.
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Many financial experts issue stark warnings about lifestyle creep. That’s what happens when your lifestyle expands as your income does, so you end up increasing your outflows as you earn more money.
Lifestyle creep can make it harder to build up a big bank account balance in some circumstances. But is it always a bad thing? Not according to financial expert Ramit Sethi. Here’s what he had to say about lifestyle creep.
Sethi’s position on lifestyle creep may not be what you’d expect
On Twitter, Sethi shared his opinion on increasing spending as your income goes up. He explained that when you increase your spending on certain expenses, like housing costs, it’s hard to ever downgrade again. This is the very definition of lifestyle creep, where your minimum expectations and spending needs expand with your income and it becomes hard to go back to cheaper versions once these new costs become necessities.
But, unlike many experts, Sethi doesn’t necessarily think this is a bad thing. “Nothin wrong with a little lifestyle creep!” Sethi tweeted. “My philosophy: Choose which is important to me, then be sure when I start spending, I have enough to never go back,” he explained.
Should you increase your spending or bank your raises?
It’s absolutely understandable why so many experts warn against lifestyle creep. If you purchase a larger house or a fancier car or start spending more on clothing just because your income has gone up, your increased income isn’t going to improve your finances long term. It won’t make it easier to live within your means or accomplish other important financial goals because you’re simply expanding your essential expenses to eat up that extra cash.
But, Sethi is also right that sometimes lifestyle creep isn’t a bad thing. The reality is, your income may go up many times during your lifetime. And as it does, you deserve to use some of that money to improve your standard of living. That’s part of why you should increase your income, and it can also help you stay motivated.
Sure, you could live like a college student forever in a cheap apartment eating basic meals and dressing in thrift store clothing — but if those things don’t make you happy and you can afford to do better, there’s no reason why you shouldn’t use your money as a tool to improve your life now.
The key, of course, is to make sure that your lifestyle creep isn’t jeopardizing your future. That’s why Sethi advises picking particular categories to splurge on that actually matter to you and making sure your spending is sustainable — rather than just upping your spending on everything as your income goes up.
Steps to build sustainable spending habits
If you’re not sure how to do this, taking these steps could help you make it happen:
Figure out how much your increased spending is actually going to cost. For example, if you want to move to a bigger apartment, research how much the rents would be for your desired space. If you can rent your chosen apartment for $200 more per month, for example, then you’d be looking at an extra $2,400 per year.See if you can fit this new spending into your budget while still saving enough and covering essential expenses. You should make sure that you’re saving about 20% of your income and that all of your fixed expenses are covered first. If you add in your new “splurge” spending to your budget and can still afford to do all the other things you need, then the “lifestyle creep” upgrade you’re considering is probably fine.Commit to avoiding consumer debt. If you have to borrow in order to finance your expanded lifestyle, you are not in a position to allow that lifestyle creep to happen.
If you are putting enough money into a brokerage account for your future, aren’t financing your lifestyle with consumer debt, and are making conscious choices about what areas of your lifestyle you want to improve as your income grows, then you are likely making good choices. You shouldn’t feel guilty about lifestyle creep in this situation, since the money you make is meant to help you live your best life both now and later.
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