In economics, inflation is defined as a rise in the general level of prices of goods and services over a period of time. In material science, creep is defined as the tendency of a solid material to move slowly or deform permanently due to stress.
So what does science have to do with the subject of personal finance? Over time, I have seen something happen with such frequency that I’ve given it a name– financial creep. Financial creep is something that happens to many people as they become established in their careers and begin to experience a bit of success. It usually happens so slowly that one doesn’t even notice it is happening. It may start off with a new house or new car, but before you know it, your lifestyle budget has doubled (or tripled).
Regardless of our best intentions to maintain a certain standard of living (aligned with our values), as household income increases, expenses seem to increase, as well. Some of that increase is inflation (which is normal and unavoidable). Some of that increase is due to creep. There is nothing wrong with enjoying a rising standard of living. After all, that is part of the American dream. Problems arise when creep gets out of control or when annual increases in income begin to slow (or stop altogether). Financial creep is almost always a lifestyle choice and often leads to an increase in fixed costs. A budget with high fixed costs does not make for an enjoyable life. It leads to stress.
What can we do to build toward financial success at the same time that we enjoy the fruits of our labor. After all, money is just a tool and should be used to enjoy the present as well as to save for the future so that at some point, work will be optional. How can we have fun and act prudently? For starters, make sure that you understand all of the ongoing costs before making a lifestyle purchase (car, boat, vacation home). Second, make sure that you will be able to handle the ongoing costs even if your income should take a serious hit. Third, make sure that this purchase is aligned with your values. For the most part, lifestyle enhancements are a one-way street. Once you fly first-class, it’s tough to go back to coach.
Here are some additional thoughts:
Don’t borrow money just because you can afford the payment or someone is willing to lend it to you. This means that you should be able to make a down payment of 20% or more before buying a new home. Remind yourself that the goal is to eventually not have a mortgage.
Pay cash for cars. It’s hard to get into trouble when you pay cash.
Reward yourself with one-time expenses. Let discretionary income pay for discretionary expenses and don’t increase your ongoing fixed costs. Rent a nice vacation home, splurge on a trip, make a large gift, etc.
Establish an emergency fund to cushion against the lean times. There will be some!
Creep is very real and dangerous. I have seen it happen with clients as well as myself. Recently, I spent some time aggregating all my credit cards, bank accounts and savings accounts to see exactly where my money was going. I used mint.com, an easy to use and free website owned by Intuit to aggregate all my accounts. The process was quite revealing. Even though my wife and I are still hitting our saving goals, our lifestyle expenses have risen more than I expected. A new baby contributed to some of the increase, but I can’t blame him for all of it! While the exercise has caused us to revisit our spending behaviors, I don’t feel stressed out by the increase. The fact that we have a relatively small mortgage, no consumer or vehicle debt, and a healthy emergency fund provides us with a lot of comfort should something happen to one or both of our income streams. If you are experiencing some financial stress in your life brought on by creep, commit to spending some time this summer taking a hard look at your lifestyle expenses. Look for ways to decrease fixed costs and the stress will begin to fade.