The Best Personal Finance Advice Ever
In the United States, talking about money, salary, and net worth are considered taboo. I’ve been known to break taboo and bring up these topics with family, friends, and coworkers. Because of this, it’s not unusual for people to ask me, “What is the best advice you can give me about money?” The first time I was put on the spot, I found myself explaining lifestyle creep.
According to Investopedia, “lifestyle creep occurs when an individual's standard of living improves as their discretionary income rises and former luxuries become new necessities.”
Think back to your early 20’s. Did you have roommates? Was your car older than it is now? What kind of clothes and jewelry did you buy? Where did you go on vacation? As your income has risen, you probably got a nicer place to live and a newer car. You may have even upgraded your clothes, jewelry, vacations, and entertainment.
This describes lifestyle creep. The fastest route to wealth is to avoid it by keeping expenses minimal as your income grows, then invest the additional income, which then creates additional wealth.
But we’re all human. Most of us don’t want to live like we did when we were first starting out.
Here’s my advice on what to do when your income initially increases:
1. Ensure that you have an emergency fund with 3 months’ expenses.
2. Start saving 10% for retirement.
3. Set lifestyle and expenses to at most 80% of income (student loan payments are considered expenses).
4. Buy a home you will be comfortable in for at least 5 years (while still accomplishing 1-3 above).
5. Go ahead and get yourself a couple-year-old reliable car. Finance it if you have to (while still accomplishing 1-3 above). Keep this car once you pay it off.
Basically, it’s acceptable to experience some level of lifestyle creep, especially when you’re young and getting settled into your career, relationship, and life in general.
Here’s what to do when your income increases more:
1. Increase your retirement savings to 12%-15%.
2. Start an additional savings account for investments outside of retirement.
3. Buy yourself a gift and go out to a nice dinner, but do not make this a habit.
I am a believer in marking promotions, raises, and new jobs with a celebration. Go ahead and buy that watch you’ve had your eye on. Head out to that restaurant you only go to for birthdays and anniversaries. This small celebration will not lead to lifestyle creep because you will associate it with a milestone.
If, for example, you buy a bigger house, a new car (with a payment), or a boat, you are experiencing lifestyle creep. These are adding expenses to your life that will continue month after month and year after year. You now need to make the new amount just to support your lifestyle. When this lifestyle creep occurs, that big promotion can’t move you closer to your financial goals.
A great financial thought leader, Vicki Robin, preaches “no shame no blame.” It’s natural for you to experience lifestyle creep. The main takeaway is to be aware of it and limit it. Keep in mind which homes, cars, vacations, meals, and clothes are luxuries and which are necessities.
For information about buying or renting a home, check out this blog.
If you’re curious about leasing or financing a car, check this one out.
And here are 3 Ways to Start Saving for Retirement.