- HENRY is an acronym for “high earner, not rich yet,” a term for those affected by lifestyle creep.
- When you get a raise and don’t have a plan for it, you easily spend that money.
- Financial planners recommend having a plan for every raise, and not letting your expenses balloon.
- Read more stories from Personal Finance Insider.
From the time I was 16 until I graduated college at 22, I worked various part-time, hourly, mostly minimum wage jobs. I’m always thankful for this time in my life because I truly believe it helped shape my financial habits and taught me how to budget, save, and plan.
But a few months ago, I started my first full-time, salaried job, and was overwhelmed with the new amount of money I was bringing home. While my salary is by no means lavish, it’s certainly more than I’ve ever made before.
Slowly, I’ve found myself enticed to spend money on things I would’ve never considered before, things like food delivery and cute apartment decor that I’d always thought were luxuries and non-necessities.
While I’ve been pretty good about staying on-track with my financial goals, the temptation to spend more as I earn more is real. And I’m certainly not the first person to experience this desire. Lifestyle creep, also known as lifestyle inflation, is a phenomenon defined as an “an increase in spending when an individual’s income goes up.” “It’s a very common thing to do,” Brittney Castro, Mint financial planner, says.
Understanding the dangers of lifestyle inflation
Without an awareness of lifestyle inflation, it can leave even extremely high earners struggling with debt, saving for retirement, or meeting other financial goals and obligations. “The negative ramifications of lifestyle creep may not appear to you until you’re late in your 40s or 50s and starting to think about retirement,” Gideon Drucker, financial planner at Drucker Wealth Management and author of “How to Avoid HENRY Syndrome,” says. HENRY stands for “high earner, not rich yet,” a common description of those who have fallen victim to lifestyle creep.
Drucker explains that there are plenty of people who come to him later in life with high incomes, sometimes over a million a year, without corresponding 401(k)s, investment portfolios, or other assets. “If we just looked at their incomes, you’d have said, ‘where’d all the money go?'” he says. “Over the years, all of their expenses piled up: the vacation home, the cars, just everything one after another.”
But it’s not just high earners who can fall into the trap of lifestyle creep, it can happen to anyone whose income increases over time. Even though I’m at the beginning of my career, I began to wonder if there are tangible ways to avoid lifestyle inflation so I don’t fall into the hole I could already feel myself inching closer to.
Planning for a raise or increase in income
“We’re all going to spend our money if there’s no plan for it,” Castro explains. That’s why it’s essential to have a plan for your new income before you even start receiving it.
If you’re expecting a raise, Castro says it’s important to look at your budget and goals before it goes into effect. “Think before that raise even hits my account, where could you send it? Why don’t you just redirect it?” She suggests using the raise to contribute to savings goals, retirement, or investments rather than directly to your checking account.
Create habits while you’re young
According to Drucker, one of the best defenses against lifestyle creep is building strong saving and investing habits young. “When you have that habit, even if it’s in smaller dollars, by the time the numbers start getting larger, it’s going to feel normal and natural,” he says. “Even with small amounts of money, you start adding more [to retirement, savings goals, investment account] slowly over time, you don’t notice it as much.”
Paying yourself first is essential
Instead of saving what’s leftover at the end of the month, it’s important to save as soon as your paycheck hits your account — automating this process makes it even easier. This is known as “paying yourself first.”
By growing accustomed to having only a certain amount of income, the temptation to spend more and save less disappears.
“I would say that people who are financially successful tend to redirect any increase in income and continue to live off a very specific number,” Castro explains.
While that doesn’t necessarily mean that you could never enjoy the benefits of a raise or larger salary, it goes back to the point of planning for your increased income and having that money go automatically to various saving and financial goals.
Without a plan, “you’re going to find the reason to spend those extra dollars,” Drucker says.
How to enjoy an increased income
When you earn more money, it’s natural to want to reward yourself for the hard work it took to get there. “It’s always about striking a balance,” Drucker says, noting the importance of a financial plan that accounts for the things you want to do and buy, not just the necessities.
“Let’s just say you get a 4% raise, maybe you decide to take 1% of that and just spend it,” Castro explains, offering a simple way to incorporate your newer income into fun spending without going overboard.
While it’s not a required formula by any means, thinking about your raise like this allows you to consciously outline how your new income can fit into your life.
Correcting lifestyle creep
If you’ve found yourself with a lifestyle creep problem, both financial planners advise going back to the basics of budgeting and planning. “Look at the numbers, look at what you can eliminate, set up a budget, and then track against it; it’s really the only way,” Castro says.
“It’s having that honest conversation,” Drucker says. “What are your expenses? How much are you actually spending per month and how much are necessities?” After taking a complete look at your financial situation, you can begin to piece together a plan that will help you correct the problems lifestyle creep can create.
As Castro says, “That’s why financial planning is so important, because you can earn a good amount of money, the hard part about it is it still takes discipline to save it.”
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