Many Australians are finding more cash in their bank accounts each payday, thanks to stage 3 tax cuts and anticipated pay rises. According to the Hays Salary Guide FY24/25, 86% of employers are planning to offer salary increases. While this extra income is certainly welcome, it’s crucial to make wise financial decisions to avoid lifestyle creep, which can hinder your long-term financial goals.

What is Lifestyle Creep?

Lifestyle creep, or lifestyle inflation, happens when your spending on non-essential items increases as your income rises. This often occurs subtly, starting with small luxuries and gradually escalating to more significant expenses. While it’s natural to enjoy the rewards of your hard work, unchecked lifestyle creep can prevent you from achieving financial security.

The Psychology Behind Lifestyle Creep

Lifestyle creep can be so gradual that you don’t even realize it’s happening. It might begin with rewarding yourself with the latest gadget after a pay rise, eventually leading to bigger expenses like a new car. Over time, these luxuries start to feel like necessities, making it difficult to scale back.

If you find yourself living paycheck to paycheck or not seeing an increase in savings despite higher income, you might be experiencing lifestyle creep.

The Potential Cost of Lifestyle Creep

The primary danger of lifestyle creep is that it can derail your financial goals. Spending all your extra income on non-essential items means less money for savings, retirement, investments, or paying off your mortgage. Over time, this can cost you thousands of dollars.

For example, if you add an extra $200 from a pay rise to your $600,000 mortgage at 6.88% interest, you could save about $123,000 in interest and reduce your loan term by nearly four years. Alternatively, investing that $200 monthly with a 7% return could grow to $34,617 in 10 years.

Who is Most at Risk?

1. Those Nearing Retirement: If you’re five to ten years from retirement, lifestyle creep can significantly impact your nest egg. Higher earnings and lower debt in this phase might tempt you to spend more, jeopardizing your retirement savings.
2. Younger Savers: Landing your first well-paying job can set you on the path to lifestyle creep. It’s easy to get used to new spending habits, which can interfere with long-term goals like saving for a house deposit or investing.

How to Avoid Lifestyle Creep

1. Create a Budget: Having a budget helps you plan your spending and ensures you’re saving a portion of your income. Calculate your expenses and set aside money for savings before allocating funds for discretionary spending.
2. Allow for Splurges: Set a ‘splurge’ fund within your budget for occasional treats, which can help prevent overspending.
3. Track Your Spending: Use apps to monitor your expenses and categorize them, so you know exactly where your money goes.
4. Set Financial Goals: Clear goals like saving for a house or retirement can keep you focused and discourage unnecessary spending.
5. Automate Your Savings: Automatically transfer a portion of your income to savings or investment accounts to prioritize long-term goals.
6. Plan for Pay Rises: Have a strategy for any pay increases. Consider saving or investing a significant portion (commonly suggested at 75%) and allocate the rest to your budget.

Next steps

Avoiding lifestyle creep requires conscious effort and planning. By setting financial goals, creating a budget, and tracking your spending, you can ensure that your increased income contributes to your financial well-being rather than just elevating your standard of living. At , we’re here to help you manage your finances effectively and achieve your long-term goals. Contact us today for personalized financial advice.