After a raise, watch out for lifestyle creep eating into potential savings.

Written by:

Leah Golob

THE CANADIAN PRESS

March 10, 2022

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Read an excerpt below.

Cindy Marques, co-founder and CEO of MakeCents, a financial coaching company for millennials, said she often sees lifestyle creep — a phenomenon where discretionary spending on non-essential items seems to increase alongside someone’s pay — with clients that are caught up in a paycheque-to-paycheque cycle. Even after getting a raise or new job with higher pay, they remain stuck living paycheque-to-paycheque.

"Unknowingly, they just slowly end up adjusting their spending accord to the money that’s available to them. They end up using it all without really advancing their financial situation," Marques said.

Llifestyle creep can also happen with self-employed individuals with sporadic income, said Marques. Whether they’re having a good month or a tight month, any extra earnings still end up getting spent.

Combatting lifestyle creep boils down to tracking your expenses, Marques said. Most problems happen when you’re not aware of how money is moving in and out of your account.

"Subconsciously we just end up adjusting our own spending based on what we see is available in our chequing account," she said. "Nothing really feels different."

Instead, those receiving a raise should create a plan for the extra money they’re going to earn. If it isn't tied up with meeting the costs of inflation, Marques recommends Canadians set up automatic savings contributions to use some or all of those additional funds to increase their net worth.

Marques said she does this with her own income so that "future Cindy" can benefit from her savings, which she calls her freedom fund.

“The way I spin it is, allow yourself to spend more because you’re making more, but also allow future you to spend that money,” she said.

For those wondering if they should use the extra cash to upgrade their lifestyle, Marques said take it case by case.

For instance, if you’ve been dreaming about renting a bigger apartment throughout the pandemic but it always felt financially out of reach, a raise would be a good time to consider allocating more money towards a move.

However, if you’re sporadically thinking about things you can buy that you didn’t necessarily need before, it’s better to resist the temptation than it is to immediately made a purchase, she said.