Controlling Lifestyle Creep

“Lifestyle Creep“ is when we finally get a big raise or pickup side income from other sources, we start to spend more.  We should be able to save this additional money, but instead the money is spent on increasing our lifestyle (via buying a new fancy car, bigger and more expensive vacations, adding new costly daily habits like lattes and buying expensive lunches).  This is the kind of behavior that keeps us from becoming financially independent!  We need to change this pattern or better yet, never let it happen in the first place!  If we save that new income, instead of going on a hog-wild spending spree, we would be well on our way to becoming financially independent.

The problem with most of my friends and co-workers is that they do spend that extra money to increase their lifestyle!

Below, I created a simplified chart to show the potential savings if we stop lifestyle creep:

After Taxes	Total	Discretionary	Expense/Income
Total Income	Expenses	Income	Ratio
$40,000	$35,000	$5,000.00	0.88
$60,000	$40,000	$20,000.00	0.67
$80,000	$45,000	$35,000.00	0.56
$100,000	$50,000	$50,000.00	0.5

*Note that the Total Expenses column will still increase a little.  This is expected because of higher tax rates and small increase in necessary expenses like gas, clothing, etc that might be required to make the additional income

The “Discretionary Income” column show how much more we should be able to save!  If we were to control our lifestyle for 10 year, that would add up to some serious savings, anywhere from $50,000 to over $500,000 dollars (depending on if we invested it or not).

The most important thing to note in the chart above, is that once we jump from 40,000 to 60,000, we add $15,000 to Discretionary Income.  So, in the example chart above, once we start to earn more than our Total Expenses, we get a huge jump in “Discretionary Income” (aka. savings potential)…  This is the key, we need to find that break even point in our finance and try our hardest to get over it by as much as possible!  Whether it be increasing our income, or scaling back our expenses, or better yet doing both!

This is the first in my wealth creation series.  Most posts like this one will be from my personal experiences, but some will also be from hanging around millionaires that I’ve grown up with or currently speak to.