Lifestyle creep is arguably one of the biggest barriers to wealth building. It’s running in quicksand, spinning on the proverbial hamster wheel. Working hard every month but never getting ahead financially. There is one simple and easy way to avoid lifestyle creep that anyone can do with very little effort and time.
Automate It
Don’t give yourself a chance to spend new money. When you get a raise at work, set up an automatic transfer to your online investment account. Someone who knows they’ll be getting a $100 raise next month would set up the automatic transfer now to their investment account. That way the money doesn’t even get a chance to sit in your checking account, where it will inevitably get spent.
To illustrate the point: If Fred knows in early October that he’ll be getting a $100 pay increase on his November 1st paycheck, he would set up an automatic $100 transfer in early October for November 1st. In other words, Fred is setting up a future transfer for his future raise.
Automate your next raise, the raise after that, and the raise after that. Keep doing this for a few years and you’ll have a lot more money invested. Do it for several years and you’ll build noticeable long term wealth. Even if you don’t want to invest 100% of your pay increases, automating any percentage will greatly help you avoid lifestyle creep. Whatever percentage you choose, the key is to automate the money so it’s not sitting in your checking account waiting to be spent.
The Numbers
Using our example from above, suppose you get a yearly raise of $100 per month for the next 5 years. After year 1, you make $100 more per month. After year 2, you make $200 more per month. After year 3, $300 more per month, so on and so forth. Some of you get larger raises than this, others less. Don’t worry about that for now, $100 is just a nice round number we can use for our example.
If we automate our yearly pay increases into an investment account, this is what our account will look like after five years.
| Monthly Increase Amount from Start Date | Automating Yearly $100/Month Pay Increases | Invested at 10% Rate of Return | Not Investing | |
| After Year 1 | $100 | $1,200 | $1,267 | $0 |
| After Year 2 | $200 | $3,600 | $4,034 | $0 |
| After Year 3 | $300 | $7,200 | $8,397 | $0 |
| After Year 4 | $400 | $12,000 | $14,517 | $0 |
| After Year 5 | $500 | $18,000 | $22,569 | $0 |
The sole act of automating yearly $100 pay increases into an investment account will leave you $22,569 wealthier after 5 years. That’s it, nothing complicated about it. Anything else you do on top of that will further increase your wealth.
Not Just for Pay Increases
This principle of automating your money doesn’t just apply to standard pay increases. If you get a year-end bonus, automate it. If you get a new job that pays more, automate it. If you get rid of cable, or negotiate a lower rate, automate the difference. If you pay off a student loan, automate the difference. Automate any positive difference in your monthly cash flow.
Automation Keeps Things Simple
People don’t like complicated things. When things get too complicated, the average person gives up. Automation keeps things simple, and it’s really easy to do. Many people make their personal finances too complicated, revert back to old habits, and end up falling victim to lifestyle creep.
Keep things simple for yourself. Automate your money, watch it grow, and avoid lifestyle creep.
How do you avoid lifestyle creep?
