Congratulations, you finally did it.
You worked up the courage to head right into your boss’s office and demand a raise for all the extra work you’ve taken on at the company.
OK, so it was more ask than demand, and sure you had butterflies in your stomach the whole time. But still, you walked out of there with your head held high and a new pay raise in hand.
Now, all you can think about is that one thing you’ve been dying to buy but couldn’t afford on your previous, pitiful, salary. So without a second thought, you go out and splurge on that very item because you’ve now got a little extra dough burning a hole in your pocket.
That right there is what we call “lifestyle creep.”
Lifestyle creep, according to Investopia, is defined as: “A situation where people’s lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities.”
For example, the associate turned manager who used to work out at Planet Fitness for $10 a month now flexes in front of the mirrors at Equinox for $230. Or, the editor turned producer who went from coupon-clipping at Vons to buying $12 almond milk at Whole Foods in the blink of an eye.
We’re not saying you shouldn’t #TreatYoSelf every now and again, especially in celebration of a promotion, but lifestyle creep can have very real consequences for your future bank account.
Here, we break down a few ways to ensure you’re putting all that new cash to good use.
Write down all the things you’d love to be spending money on
No matter how much you currently earn, write down every single last thing you really, really want in the future. This can include a house, a car, a boat, a vacation to Tahiti, a child, or all of the above.
Next up, do a little math on how much your dream life costs. A child, for example, will cost you about $233,000 over the course of her first 18 years, while a new car will set you back just over $33,000.
After your list (and your painfully expensive math) is complete, look at your list and put it in order of importance. In the end, money should really buy you happiness. So put the thing that will make you happiest first.
This is your official “I want it” list.
Now it's time to...
Make sure to pay your future self first
As personal finance author Thomas Corley explained in a post, delayed gratification can pay off in a big way for those who recently received a pay bump. This means, “putting off what you want today so that you can have something to fall back on in the future.” This, he says, will help you build wealth.
And if you need further proof, just look at Stanford’s Marshmallow experiment.
In the late 1960s, the school ran a series of experiments with children showing the effects of self-control and delayed gratification. In the experiment, children were given two options: The first was they could eat the delicious-looking marshmallow now, or wait 20 minutes to receive an even bigger reward (TWO marshmallows) later.
Thirty years after the initial test, the team followed up with the children and found that those who delayed gratification had higher SAT scores and a lower body mass index (BMI) than those who simply dug into the first marshmallow they saw.
So once you have that new paycheck in hand, it’s time to pay up to your future self by essentially giving older you two marshmallows and just saying no to one.
So, if you aren’t already maxing out your company match on your 401k do so now. This is free money, and with compound interest could mean thousands, and potentially hundreds of thousands, more upon retirement.
After paying your 401k it’s time to…
Stack an emergency fund
Yeah, sorry, it’s yet another un-fun thing to spend money on. But it’s clutch to your survival if you lose your job, break up with your partner, or have unforeseen expenses.
To figure out just how much you need in the fund calculate your regular monthly needs (not wants), such as rent, bills, groceries and any other must haves. Then, multiply that number by three and save up that much in an emergency fund you only use if something goes horribly wrong.
After that, it’s time for…
“I want it” fund time!
After Dividing up your new money into a savings and emergency fund, it’s time to put together a few different accounts for your “I want it” list. You need to decide if you want to go for that one big ticket item or slowly save up toward several things at once. Either way is totally OK and completely up to you.
After you set the goals, it’s time to...
Gradually introduce all the things you really want to buy from that “I want it” list into your life
Work toward your “I want it” list slowly. Save up separately for each item and check it off the list as if you never got that raise in the first place.
But, along the way, still think about if you really need what you think you need. For example, instead of buying a brand new car perhaps look into purchasing a slightly used model.
Think of it this way: If a 30-year-old buys a brand new $33,000 car its value will depreciate 19% within its first year. But, if that same 30-year-old invested that $33,000 into their retirement account they could turn it into more than $101,000 by the time they retire at 68 years old. And that’s with an average market interest rate of just 3%.
By taking the little steps of thinking about what you really want, paying yourself first and gradually working toward and saving up for all that new stuff you’ll also be giving your future self the peace of mind that one day you’ll buy yourself the best gift of all: A healthy, wealthy retirement, and that is the greatest luxury item of all.