Watch Out for the Creep

You’ve finally done it — you landed that new job. It probably took several rounds of interviews, a ton of studying and networking, along with countless online searches.

Who could blame you for wanting to reward yourself?

But it pays to be careful when you get that first new paycheck, especially if your salary has increased significantly — because this influx of money can start making things creepy.

Well, not that kind of creepy. (Unless this job pays you so much you have to start worrying about being kidnapped or something.)

No, we’re talking about lifestyle creep. It happens when you walk into that gourmet grocery store, and all of a sudden, you can afford whatever you want — whether you need it or not. When you decide a new luxury car is in order, even though the sedan you have now runs perfectly fine. Or when you start thinking your apartment just isn’t big enough, despite the fact that you’ve got a room sitting empty right now.

A natural phenomenon

It’s natural. You adjust your spending based on what you can spend, instead of what you should spend. Sometimes, the changes are small, like dining out more often, or moving from generic juice to organic. Those aren’t going to get you into too much trouble.

But I see this phenomenon, famously introduced by financial planner Michael Kitces, at far more dangerous levels. Often, when one or more members of a household hit the “magic” $100,000 threshold, they start thinking they deserve massages, club memberships, etc.

Usually, their savings rate remains the same, even as the spending needle starts moving higher. Even worse, these folks are prime candidates for the Diderot Effect, which basically is the notion that buying new stuff can lead you into a spiral of buying even more new stuff.

Of course, not all spending falls into the “frivolous” category — and my job as a financial planner isn’t to tell you that you don’t deserve that new car, or that the generic cereal is really just as good as the brand-name stuff.

A businesslike approach is best

Instead, what I help people do is evaluate their cash flow, just like a business would. That new car will provide you with some pleasure today, but how will it impact your finances tomorrow? What’s the benefit to staying in your current home versus limiting your expenses?

The answers are different for everyone. I’ll help you find them — even while you find ways to reward yourself for all that hard work.

Because you deserve those rewards. But you deserve a strong financial future, too.