Lifestyle Creep: The Investor's Silent Dilemma

As a financial advisor, my responsibility is to help investors make informed decisions to grow and protect their wealth. One subtle threat to long-term wealth accumulation I often see slip under the radar is lifestyle creep. Lifestyle creep, or lifestyle inflation, is the gradual increase in spending as one's income grows. This phenomenon can jeopardize financial goals and prevent investors from reaching their full potential. In this article, I'll outline the dangers of lifestyle creep and provide strategies to help investors mitigate its impact on their financial well-being.

Recognizing Lifestyle Creep

Lifestyle creep starts with small, incremental changes in spending habits. For example, after a salary raise, it's natural to indulge in extra luxuries or upgrade to a more expensive car. While it's important to enjoy life and reward oneself for hard work, unchecked lifestyle creep can erode savings and derail long-term financial goals. The key is to strike a balance between enjoying life today and investing in one's future.

Consequences of Lifestyle Creep

Lifestyle creep can have negative consequences for investors, including:

Reduced Savings Rate: As spending increases, the proportion of income allocated to savings and investments may decrease, significantly delaying financial goals such as retirement or buying a home.

Increased Debt: Lifestyle creep can lead to higher levels of debt, especially if one relies on credit cards or loans to maintain an inflated lifestyle. High-interest debt can rapidly erode one's net worth and create financial instability.

Diminished Financial Security: A more luxurious lifestyle often comes with higher fixed expenses. These ongoing expenses can make it difficult to adapt to unexpected financial challenges, such as job loss or market downturns.

Strategies to Combat Lifestyle Creep

Investors can implement the following strategies to prevent lifestyle creep from undermining their financial goals:

Paying yourself first: This is the kryptonite of lifestyle creep – when people pay themselves first it prevents them from increasing their expenses while helping with their financial goals. As an example, if someone receives a 5% raise and increases their 401(k) contribution by 3%, they are putting their goals first over new expenses, while still giving themselves a modest raise.

Review your financial goals: Our team is here for all our clients they have a clear path to achieving their goals. If you are confused on what your goals are or what is needed to reach these goals, please book a time with us here so we can review them together.

Maintain a Budget: Create and adhere to a comprehensive budget that includes all income sources, fixed and variable expenses, and savings and investment contributions. Update the budget regularly to reflect income growth and ensure that increased spending doesn't come at the expense of financial goals.

Automate Savings and Investments: Set up automatic transfers to savings and investment accounts to ensure that a fixed percentage of income is allocated to wealth accumulation, regardless of changes in spending habits.

Keep Lifestyle Inflation in Check: Regularly assess spending habits and making adjustments as needed to strike a balance between present enjoyment and future financial security. This may include delaying major purchases, reevaluating "wants" versus "needs," and seeking more cost-effective alternatives.

Maintain an Emergency Fund: Set aside at least three to six months' worth of living expenses in an easily accessible account to provide a financial safety net in case of unexpected emergencies or job loss.

Lifestyle creep can silently erode long-term wealth accumulation if left unchecked. By implementing these small strategies, investors can strike a balance between enjoying their present lifestyle and securing their financial future.

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Steven Evensen is a Financial Advisor of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$1.8B billion in assets under management as of 09/30/22. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."

“Gerber Kawasaki Wealth & Investment Management is an investment advisor located in California. Gerber Kawasaki Wealth & Investment Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Gerber Kawasaki only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Gerber Kawasaki Wealth & Investment Management ‘s current written disclosure brochure filed with the SEC which discusses, among other things, Gerber Kawasaki Wealth & Investment Management's business practices, services and fees, is available through the SEC's website at: [https://www.adviserinfo.sec.gov](https://www.adviserinfo.sec.gov "smartCard-inline") .”