It’s a familiar story: if you’re in your 20s or 30s and take charge of your finances now, you’re on the path to becoming a millionaire, or even a multi-millionaire. Achieving financial stability at a young age often involves minimal compromise. However, there are exceptions to this rule, and one common culprit is lifestyle creep. 

At ARC Wealth, we frequently encounter individuals or couples who unknowingly succumb to this financial pitfall. Let’s explore the insidious nature of lifestyle creep and how to recognize and combat it.

Signs of Lifestyle Creep

Lifestyle creep is akin to the gradual process of aging; it sneaks up on you. Here are some signs:

Credit Card Debt: If you consistently carry a balance on your credit card that you can’t pay off each month, it’s a red flag.

Inadequate Savings: Compare your savings to your income and cost of living. If you’re saving too little in relation to these factors, it’s a sign of lifestyle creep.

The Influence of the Joneses

We all know the Joneses, the ones whose Instagram feeds are filled with exotic trips and lavish dining experiences. Sometimes, we wonder how they afford it all. Even if you don’t spend all your time with them, the pressure to keep up can be real. However, it’s essential to realize that succumbing to lifestyle creep hurts you more than it does them.

The reality is that the Joneses are victims of lifestyle creep themselves. 

They likely have minimal savings and carry credit card balances, living solely for the present without considering the future. It’s up to you to decide if future financial preparedness matters to you. 

There’s no magic involved; the key to preparing for tomorrow is planning today.

How to Determine What You Can Afford

Many people believe they’re bad at budgeting, but the secret isn’t just budgeting; it’s about saving first. Warren Buffet’s wisdom rings true: “Don’t save what’s left after you spend; spend what’s left after you save.”

We recommend a different approach, the Reverse Budget.

Once you establish your savings goals, you’ll know how much you need to save and where. The remaining portion of your income is what you can spend. As a general guideline, allocate 20% of your income toward future goals, while the remaining 80% is for current expenses. 

If you’re currently living paycheck to paycheck, reaching the 20% savings goal might not be feasible right away, but it’s a goal worth working toward.

Getting Back on Track

If you suspect you might be living beyond your means, it’s not too late to make changes. 

Start with a small step: track your spending diligently for a week. Even if there are no surprises, this exercise helps you become reacquainted with your lifestyle and prepares you for assessing potential lifestyle creep.

Understanding where your money is going will give you a clear picture of how much you need to earn to support your current lifestyle. 

From there, you have two choices: earn more or spend less. 

While increasing your income can be exciting, it often requires additional effort.

On the other hand, cutting back on expenses can be a more manageable, but arguably less impactful, path to financial stability.

Getting back on track may require some effort, but it’s far less painful than the alternative—debt, long-term financial struggles, and the need to compromise your lifestyle. Remember, taking control of your finances now can set you on the path to financial security and eventual wealth.