How Lifestyle Creep Can Derail Your Retirement Plans

If you've ever gotten a promotion or raise, you may have found yourself living large for a while. Maybe that meant eating out more, buying nicer clothes, or upgrading your home. After years of watching your budget, it felt good to let loose and spend.

That's called lifestyle creep. The more you earn, the more your lifestyle expands.

That may be nice for a while. However, if that extra spending means you have less money left to save or invest, or debt begins to pile up as you spend more on extras, lifestyle creep may derail your retirement plans.

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Key signs you're experiencing lifestyle creep

As the word "creep" suggests, lifestyle creep can sneak up on you. You may be busy living your best life without noticing how much your spending habits have changed. Here are some key signs that lifestyle creep has snuck into your life (and finances).

• Increased spending: Each time your income grows, your expenses grow similarly.
• Financial progress slows: You may save less or reduce your retirement account contribution. You may even use credit cards to cover necessities more often or fail to pay them off in full each month, causing you to be mired down by high interest.
• Your stress over money grows: Ideally, a promotion or raise would lead to less financial stress. If that's not the case, you may have allowed your financial obligations to grow to an uncomfortable level.

Outsmarting lifestyle creep

We don't live in an all-or-nothing world, and there's no shame in celebrating your success. The trick is to celebrate without risking your future. By all means, if you come into more money than you're accustomed to, make the repairs to the house you've been putting off, buy a new fall wardrobe, or splurge on a nice vacation.

What you don't want to do is become a prisoner of your newfound success. The best way to take control of your money (without allowing it to take control of you) is to plan, track, and be mindful of spending. Here's how:

Build a realistic household budget

If you've had trouble sticking with a budget in the past, perhaps it wasn't realistic. For example, if you didn't budget for small things, like meeting friends for dinner or a higher-than-usual water bill, it's easy for the entire budget to seem like it's falling apart.

According to Fidelity, you don't have to track every dollar unless you want to. Instead, Fidelity suggests trying the 50/15/5 method of budgeting. Here's how it works:

• 50%: Put 50% of your take-home pay toward necessary expenses. For example, if you bring home $5,000 monthly, use $2,500 to cover housing, transportation, groceries, insurance, and other essential costs.
• 15%: Use 15% of your pre-tax dollars for retirement contributions to a retirement plan, such as a 401(k) plan or traditional IRA. This includes any funds your employer matches.
• 5%: Save 5% of your take-home pay for short-term savings, like an emergency fund.

You may notice that Fidelity's budget plan leaves 30% of your take-home pay on the table. That's money you can spend in any way you'd like or reroute to additional savings to help you meet future goals.

Get a thrill from saving and investing

Do you know that tiny thrill you get when you buy something you've wanted for a long time? It's natural. For shoppers, even thinking about making a purchase causes them to release "feel-good" hormones, including dopamine, serotonin, and endorphins. That's one of the reasons it can be so hard to cut back on spending.

However, there's good news. Thanks to neuroplasticity, you can "rewire" your brain to enjoy saving and investing the same way you once enjoyed spending. Science shows that regularly monitoring your finances transforms the impulsive "I want it now!" circuit into a more deliberate "Is this aligned with my goals?" thought pattern.

That thrill you once got from spending can be transferred to the thrill you'll get from saving and investing, as the "feel-good" hormones are released into your body.

It takes practice, but with time, you'll find that your brain is on your side, rooting for you to be financially successful. Each time you tuck money away for a rainy day, invest in stocks or bonds, or pay off debt, the flow of hormones will transform your entire body.

For many, lifestyle creep is a natural result of over-celebrating financial success. The goal is to accept all the good things that come your way without sabotaging your future.

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