If You’ve Got It…
It’s a bright shiny new year. And for some of you, 2025 will be a year in which you will have more income. New job? Promotion? Business takes flight? Whatever the reason, for some there will be significantly more money to spend on an ongoing basis and let’s be honest — you will spend it.
I am not telling you not to.
(Alright, if you have debt or are behind on your savings, then yes, I am telling you not to spend it.)
But for the rest of you whose goal list is up to date (This is a key point!), this may be an opportunity to upgrade a few things in your life. Your lifestyle can creep, as they say. And I am totally okay with that…with a few caveats.
Consider the difference between “durable lifestyle creep” and “non-sticky lifestyle creep.” Perhaps your idea of how to spend your newfound wealth involves fine dining, international travel or a costly sports-related hobby. This isn’t particularly dangerous in my view. If your priorities change and you add items to that aforementioned goal list, or if your good fortune wanes, you can simply turn this spending off. It’s not “sticky” spending.
But what if you decide that this is the moment to change your residence? Or take on a new, larger car payment? Send your child to private school? Now you have changed the basic infrastructure of your lifestyle. You have taken on significantly higher fixed costs that will persist for years to come. This could become a pretty serious problem if your income later falls (by choice or by circumstance), unless you take a few steps to inoculate yourself.
Do this: Whatever amount you set previously for your emergency fund, increase it. Obviously, your fixed expenses (rent, mortgage, car payment, for example) are higher than before, necessitating a need to recalculate.
But also consider that, as a general rule, it is harder to replace a higher income than a smaller one should you become unemployed. Where you may have been content before to hold a cash reserve against the possibility of a three-month spell of unemployment, now you may want to think in terms of six months. Maybe even longer depending on your industry.
Think of it this way: If you were to use your new salary to buy a more expensive home, you would increase the amount of your homeowner’s insurance to protect it from harm. Upping your cash reserve is the same concept; you are increasing your insurance coverage to account for the greater amount of risk you have taken on.
While we arrived at this point in the discussion based on the premise that your long-term savings plan was completely intact, let’s revisit that assumption. Never have I ever heard someone say that their plan in retirement was to have a “lesser” lifestyle than they enjoy today. Yes, one often plans to spend their money differently in retirement, but usually not much less in total, if at all. If your regular retirement contribution amount is predicated on your lifestyle expenses today and that amount increases, go back and recalculate your contribution rate to make sure that your retirement plan is not based on out-of-date data.
I realize that for some, the idea of cheerfully embracing lifestyle creep is anathema to their core values. My view is that in the real world, it is inevitable. Very few people aspire to spend their middle years reliving their spartan post-school lifestyle. And if you can afford not to, why should you? Embrace the quotidian delights your wealth has enabled! Just understand that as your fixed habits become more costly, your financial vulnerability may also increase, so plan accordingly.
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