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Had a raise? Beware the pitfalls of lifestyle creep

Published Apr 13, 2022

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Dominique Bowen

Late nights. Early mornings. Lost Sunday afternoons. Nightmare clients. Missed school plays. Circles under eyes. Copious cups of coffee. Pitches and presentations. Closed deals.

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They’ve all strung together into the journey it’s taken to reach your promotion or salary raise. And a long journey it’s been, with a hard-earned reward at the end. But before you start living a little larger and trade in your jalopy for a Jag, pump the breaks and take a step back. Lifestyle creep is real, and if you’re not smart about how you manage your increased income, it could sneak up and steal your extra rands just as soon as you’ve started earning them.

So, what exactly is lifestyle creep?

According to credit bureau Experian, lifestyle creep refers to the increased discretionary spending some people engage in when they start receiving an increased regular income. You may be thinking, “Well, of course you’d spend more when you start earning more”, but that’s not the real issue here. The problem is when all that extra money gets absorbed into frivolous spending, with little thought spared for longer term goals. It’s what Hester van der Merwe, wealth adviser at Ultima Financial Planners, says is one of the most common money behavioural mistakes she sees her clients make when they get a salary upgrade. “This usually results in the increase being consumed almost unnoticed by odds and ends,” she says.

Terence Tobin, a family-focused financial adviser, discusses a common reason for this spending. “Second to inflation, lifestyle creep can be a serious problem, as the individual often feels that they have ‘earned’ or ‘deserve’ this increase, so they must indulge to show themselves or others how well they are doing,” he says. “This is detrimental in the long term and, more often than not, unsustainable.”

Think bigger picture

Delayed gratification is a buzzkill to the part of our brains that light up when we hear there will be a substantially bigger deposit hitting our bank accounts monthly. When you’ve been daydreaming about the new wheels, the restaurants you’ve been dying to try, the vision-board vacations and an overall lifestyle upgrade, the last thing you want is to continue living the same old life you’ve had up until now.

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But what about the variety of options you’ll have at your fingertips – the ones that’ll dwarf the new wheels, nights out and poolside cocktails – when you’ve hung onto those extra pennies and sprinkled some compound interest on them? “Continuing to spend less than you earn, and investing the rest, is what ultimately provides options, and ensures financial freedom can be achieved,” says Tobin.

Just the same way a salary cut should be something you share with your financial planner, an increased income creates need for an adjusted financial plan, too. Yes, even if you were getting by just fine and sticking to your guns before you came into more money, your financial planner needs to know about your new income to help optimise your plan. “A change in your income impacts your plan in many ways, such as saving and investment goals, retirement planning, tax planning and insurance planning,” says Tobin. “To ensure the effect on your plan is factored in, and adjustments are made where required, it’s important to involve your financial planner.” Think about it: your extra cash could help you pay down your home loan a lot quicker, helping you save on interest and perhaps put more towards your children’s spot in a top school, or a cottage in that cushy lifestyle estate you’d like to retire in.

Van der Merwe adds that a lifestyle plan shared with your financial planner will take note of your lifestyle-related goals, too, like travel and hobbies. “Discussing this will ensure that your new income is applied optimally, and not just slurped up by a lifestyle adjustment,” she says.

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Finding the middle ground

Avoiding lifestyle creep doesn’t mean denying yourself the perks of having some spare cash at hand to enjoy. You have, after all, earned every cent of it, and deserve a calculated treat (emphasis on ‘calculated’) for having reached this milestone. Every financial plan is unique, but Tobin and Van der Merwe share some considerations your financial planner is likely to have when you discuss how your plan can be adjusted to make that extra bit of cash flowing in work even harder for you.

  • “Look at investing a large portion of your increase,” they both recommend. If you have investments running already, bump up your debit order.
  • Review your budget to ensure it’s realistic and manageable – and stick to it, says van der Merwe. Also be patient and plan for your luxury items.
  • Don’t forget the tax man! If your new salary puts you into a different tax bracket, plan with this in mind, says Tobin.
  • And finally: Getting a bonus or increase is a reward, so do enjoy it, but remember to reward your future self too.

PERSONAL FINANCE

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