Lifestyle creep is when your income increases for any reason, but instead of the additional money going towards your financial goals, it runs right through your hands and disappears. So more money, but no long term changes to your financial future.

One of the key steps here is to actually be paying attention to your money so you know when you get an increase in your income. This can happen in many different ways. The most obvious is a pay increase, but there are other ways you can see an increase in the money coming into your bank account. Think about things like bonuses, income tax refunds, and any other infrequent income. If you are Canadian, depending on your income, this could also happen each year if you max out on your CPP and EI contributions.

Now the big question is, what steps do you need to take to avoid lifestyle creep?

1 - The most important step is pay attention to your income so you know when you have an opportunity to put more money towards your financial goals! If you are in avoidance mode of all things money, it is so common that you don’t even see an increase. If this is you, know that you are not alone. I see this all the time and being aware is the first step!

2 - Have clear financial goals. This is important because it will help you stay focused when you are deciding what to do with your ‘extra’ money. Without clear plans, your emotions start to take over and tempt you to put the money towards things that aren’t important to your bigger financial picture. If you aren’t sure where to start with financial goal setting, CLICK HERE to get access to a free resource that will help you walk through how to set goals that are connected to you and your values!

3 - Now it’s time for action. I really encourage you to make the decision on where the money will go before it hits your bank account (to avoid those emotions coming into play). Depending on the frequency of your additional income, this is where you have to make some decisions. If it is a one time bonus or income tax refund, as soon as you know the amount, decide where it will all go. Will the full amount go towards your current financial goal, or will you split it up? There’s no right or wrong answer here. Maybe half of it goes toward your current goal, 25% goes towards a purchase you’ve been eyeing up for months and the other 25% goes towards a nice dinner out or another fun experience you’ve been planning. And it doesn’t have to be the same every time. Decide based on where you stand financially when the money will be coming to you.

If your income increase is a raise that will be part of each paycheck from now on. I love using automation to put it where you want it to go. If you’re going to get an extra $50 per pay, set up an automatic transfer to savings or an automatic bill payment towards your debt each payday. This can really be a huge help to increase your savings or decrease your debt pretty quickly!

Making small increases to our mortgage payment when we received raises helped us to pay off our mortgage almost 10 years early. Each time we got an increase, we would put about half of the increase toward the mortgage. Seeing the difference it made when you type the numbers into a mortgage payoff calculator was very motivating for us (okay, mostly me)!

Let me know in the comments what you have done to move you forward financially when you received a pay increase!

-Sherry