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After a raise, watch out for lifestyle creep eating into potential savings

In early April, Kelsey Cruz did what many are doing at this time of low unemployment and high demand for talent, she left a job she loved for another that promised her new challenges and a higher salary.

In her new role, the 26-year-old Torontonian has managed to get a $40,000 a year pay bump, but Cruz still worries about overspending as her lifestyle potentially creeps up with her salary, especially with inflation running so hot.

“I feel like a lot of my friends and people I hang out with are in a similar place in life. All do well for themselves so sometimes there’s a feeling of trying to keep up with them, and it can get expensive,” she said.

Cindy Marques, co-founder and CEO of MakeCents, a financial coaching company for millennials, said she often sees lifestyle creep — a phenomenon where discretionary spending on non-essential items seems to increase alongside someone’s pay — with clients that are caught up in a paycheque-to-paycheque cycle. Even after getting a raise or new job with higher pay, they remain stuck living paycheque-to-paycheque.

“Unknowingly, they just slowly end up adjusting their spending according to the money that’s available to them. They end up using it all without really advancing their financial situation,” Marques said.

Lifestyle creep can also happen with self-employed individuals with sporadic income, said Marques. Whether they’re having a good month or a tight month, any extra earnings still end up getting spent.

Cruz said she has seen her spending creep up already. Since the new job, she’s been spending those extra earnings on daily Starbucks runs, going out more to bars and restaurants, and grabbing Uber rides without hesitation.

“There are so many monthly expenses that are so unnecessary, but since I’ve been making more money, I’ve justified to myself that it is OK because I can afford it and because I have an ‘I deserve it’ mentality when it comes to spending money.”

Combatting lifestyle creep boils down to tracking your expenses, Marques said. Most problems happen when you’re not aware of how money is moving in and out of your account.

“Subconsciously we just end up adjusting our own spending based on what we see is available in our checking account,” she said. “Nothing really feels different.”

Instead, those receiving a raise should create a plan for the extra money they’re going to earn. If it isn’t tied up with meeting the costs of inflation, Marques recommends Canadians set up automatic savings contributions to use some or all of those additional funds to increase their net worth.

Marques said she does this with her own income so that “future Cindy” can benefit from her savings, which she calls her freedom fund.

“The way I spin it is, allow yourself to spend more because you’re making more, but also allow you to spend that money in the future,” she said.

For those wondering if they should use the extra cash to upgrade their lifestyle, Marques said take it case by case.

For instance, if you’ve been dreaming about renting a bigger apartment throughout the pandemic but it always felt financially out of reach, a raise would be a good time to consider allocating more money towards a move.

However, if you’re sporadically thinking about things you can buy that you didn’t necessarily need before, it’s better to resist the temptation than it is to immediately made a purchase, she said.

In Cruz’s case, she’s still finding the right balance between saving and enjoying the rewards of her hard work.

“With the new job, I had to take a look at my finances and create a new budget to make sure that I am saving more, but I have also allocated more money to entertainment and personal care services, like nails and hair.”

This report by The Canadian Press was first published May 10, 2022.

Leah Golob, The Canadian Press

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