Lifestyle Creep

What is the number one reason that we see members of the Steward community stuck in a job that they hate? Lifestyle creep.

In the face of the "Great Resignation," and people increasingly wondering if they have the financial freedom to walk away from their job -- temporarily for a sabbatical, or permanently for a more substantive life change -- this topic is more important than ever.

We're happy to collaborate with NerdWallet in exploring this.

See the full article article here: https://www.nerdwallet.com/article/investing/lifestyle-creep, and thoughts on what to do about it below! 

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Why does lifestyle creep matter?

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• Folks agonize over negotiating pay or maximizing their returns by a couple % points. But the real wealth killer? Lifestyle creep. 
• It sounds like "I'm working so hard, don't I deserve x?".
• If you're getting a piece of the American Dream that your family hasn't had before, I especially empathize. 
• But here's the risk. Spending becoming a ball and chain to the wrong job.
• Keeping lifestyle creep at bay, gives you the optionality to (a) walk away from a job you don't enjoy and (b) accelerates your path to financial freedom = work being optional

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How do I spot if my lifestyle is creeping?

A) If you're qualitative:

No one sets out to over-spend! It sounds like "I'm working so hard, don't I deserve x". If that's been your mental script recently, this might be worth exploring.

B) If you're quantitative:  

‍I look out for the 2 key canaries in the coal mine:

1) Housing is most people's highest expense, so I look out for where housing costs have crept past 25-30% of your net income.

2) I also look out for when savings is under 20% of your net income. That's a sign that your lifestyle spending may be growing faster than they'd like it too. 

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Start with why: what causes lifestyle creep?

Even among high-earning clients ($250-500K+ in income), when we asked folks to name their number one financial challenge, nearly half answered it was cash flow and not being able to save enough.  I love the chart below from Financial Samurai on "how to make $500,000" a year and still feel average. We help our clients to generate a similar cash flow chart for themselves (as their household CFO), and some jokingly call this their "Where the F's the money!" chart.

So what's the root cause? The drivers were multi-fold:

(a) starting careers solidly in the red having amassed significant student debt -the price of admission to a high-income career 

(b) early working years overlapping with major financial burdens like first home purchases and having children 

(c) "lumpy" pay given a high % of pay coming from bonus or equity payments, which made it tricky to commit to a savings program 

(d) "emotional spending" for folks who felt that they owed themselves splurges for their demanding work schedules

(e) "keeping up with the Joneses" propagated by their company's "work hard, play hard" culture and 

(f) forced early retirement in careers like consulting and law that are "up and out", which dialed up the pressure for their limited working years

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What to do about it: what are strategies for stopping lifestyle creep?

A. Start with a mindset shift: your money can earn more for you than you can.

• As the child of immigrants, I was raised with the mentality of "keep your head down and WORK" - tunnel-vision on working hard, earning that next raise, and at the extreme "no pain, no gain". But the numbers show your money can earn more than you can over your lifetime.
• In order for your money to earn for you (...and to earn even more than your job is earning for you), you have to invest.
• And in order to invest, you have to not spend it all today.
• I'm not suggesting an extreme of living like a monk, or even going full-on FIRE and living on ramen. I'm suggesting you "pay" your future self so they can live the American Dream too. You can do that by starting to...

B. Reverse Budget to enjoy "guilt-free" spending

- Looking over your shoulder to nickel-and-dime every purchase is a quick way to feel miserable. Few people stick with apps like Mint for that reason. 

- Instead, pay your future self first. 

- How? Automatically deposit a part of your paycheck each month in long-term investments. You'll have a "set-it-and-forget-it" way to ensure you're not overspending. Think of it like filling your plate with veggies so there's less room for dessert.

- Steward can help you calculate personally how much to invest each month vs. keep in cash, and where to invest in a tax-optimized way here

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C. Focus on the big rocks of spending that matter.

-This means, forget about budgeting lattes. Waste of mental energy. 

- Housing is most people's highest expense, and in my past-life as a white-glove advisor to ultra high net worth families, I spent a lot of time helping wealthy people unwind their real estate. 

- Avoid their mistake and be judicious when selecting where you live so that rent or housing costs don't creep above ~28% of your pre-tax income. 

- In other words, as “above-average” earners, I encourage you to be “above average” on reigning in your housing spend as well (you can see averages in this chart) 

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D. Last resort: look at your spending last year in three ways:

(1) The Values Approach: 

- List out your 3-5 core values

- Try to tie up your major spending categories to one of your core values (e.g., family, education, etc.).

- Were there any spots where spending didn't link up with a value? Could those be cut?

(2) The 80/20 Approach:

- Make a list of items or services you spent on that cost over $500 last year.

- Rate each as high/medium/low satisfaction/ can’t even remember what this was.

- Any ideas on what to adjust after that?

(3) The Selfish Approach: 

- okay that's a bit cheeky! What I mean here is breaking down which of your major purchases which ones were truly for you (e.g., an incredible meal, a vacation you've always dreamed of) vs. spending to impress others (...tough to admit, but real). Why? The comparison game is set up for loss. There's always a bigger boat.

- I'm all for splurges as long as they're focused on making YOU happy vs. nebulous and never-satisfied "society" happy. "Selfish" spending is a great way to differentiate.

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