More Income but Less Money?

A subtle yet significant threat to wise money management is an increase in income. Yes, that next pay raise or even an inheritance can make you worse off.

I recently met with a couple regarding their finances. They had solid income that had increased multiple times over the past few years. They had retirement accounts that they were still funding and giving to their church was a priority. By most accounts, they were doing everything right. The problem was that their spending had eventually exceeded their income. They accumulated credit card debt and acutely felt the stress it brought. Their situation was not dire but they couldn’t understand why it was getting harder.

After listening and talking it through, I made the diagnosis that they were suffering from “lifestyle creep.” I know it sounds like the beginning of one of those long, uncomfortable commercials where I would then prescribe a drug and warn them of fourteen far worse side effects. But this diagnosis simply indicates that with each raise in income, they increased their spending by at least as much if not more. Their new wealth was consumed by new luxuries and conveniences that became seemingly indispensable. Then, when the car broke down or the washing machine needed replacing, they found themselves short on funds.

It’s not uncommon for the perception of increased wealth to exceed the actual increase in wealth. Here’s a test: Take ten seconds or so to respond to this question — If you received an extra $1000 right now, what would you do with it? Any chance your ideas might have exceeded that $1000? It’s not difficult to spend that money many times over.

I did get a bit clinical with the couple. I told them their “creep” was treatable, and I prescribed them a bit of hard work and difficult choices. The first step was to write out their income vs. spending and cut out some unnecessary expenditures — at least enough to pay down the credit cards faster and have some buffer in the monthly cash flow. They admittedly couldn’t easily identify unnecessary spending. They had no yacht cleaner-boy to fire or a daily waxing of the Porsche to eliminate, but they managed to come up with a handful of expenses to eliminate or reduce. One item was decreasing their eating out budget: lunches during the workday, $4 coffees, and dinners out. They also agreed that the next pay raise would serve to increase their buffer rather than be used for spending. At the end of the day, it turned out to be minor surgery avoiding a more serious operation later if left untreated.

I commended them for their willingness because although the solution was simple, it’s not easy. Income and expenses change regularly. Wise financial management calls for a periodic comparison of the two. How often is up to you — perhaps each time you pay the bills or maybe a quarterly overview. Determine to make minor changes when needed to assure that you stay living within your means. While it may not be pleasant to do at the time, it’s far better than having to make major changes down the road. Procrastinating can cost you money, time and unpleasant emotion.

If you can follow the doctor’s orders for wise stewardship now, the prognosis is a release from the burden of debt, progress toward a productive future, and a sense of freedom.

Whether “lifestyle creep” is something you need to address now or be on the lookout for later, be mindful and purposeful in managing your finances…