Many high-income earners work hard to increase their earnings, but unfortunately, one common issue can prevent them from reaching their retirement goals: lifestyle creep. It’s the subtle—and often unnoticed—growth of discretionary spending as income increases, and it’s a serious barrier to financial independence.

But how? How could this happen because doesn't simply making more money solve those problems? Only without a plan of attack. Let's dive into it.

What Is Lifestyle Creep?

Lifestyle creep is the phenomenon where individuals receive additional income, whether from a raise, bonus, or new job, and instead of using it to save or invest, they increase their spending. This often leads to a situation where, although you’re earning more, you’re not building wealth at the same rate. Your savings rate remains low while your spending grows, which means less money for your future.

This can feel like a natural response—who doesn’t want to upgrade their lifestyle when they earn more? However, over time, this can lead to delayed goals or, worse, an inability to retire at all.

The Common Reactions to a Pay Raise

When it comes to raises or bonuses, many people fall into one of two categories:

• Option A: Some individuals increase their savings rate slightly to stay on track with their goals but spend the rest of the raise on upgraded lifestyles.
• Option B: Others don’t adjust their savings rate at all and simply spend the entire raise, raising their new standard of living altogether.

Both options can keep you trapped in the cycle of working harder without making meaningful progress toward financial independence or retirement.

What’s the Right Solution?

According to Morningstar’s "More Money, More Problems" report, they tested different models to determine effective ways to save more money as your income increases. They tested three ways to keep lifestyle creep in check while boosting your savings as new income arrives. The key is using one of these strategies for each raise or bump in income:

Option 1: Spend Twice Your Years to Retirement

• Example: If you plan to retire in 10 years, you would spend 20% of your raise and save the remaining 80%.
• Why It Works: This rule is particularly useful for those approaching retirement. By saving a larger portion of any income increase, you can ensure that you’re building a larger nest egg in your final working years.

Option 2: Save Your Age as a Percentage of the Raise

• Example: If you receive a $5,000 raise at age 30, you should save $1,500 (30% of the raise).
• Why It Works: This strategy is effective for individuals under the age of 45. It allows you to save a reasonable percentage of your income while still enjoying some of the benefits of your raise. The older you get, the more you should save, which ensures you're well-prepared for retirement.

Option 3: Save 33% of Your Raise

• Example: If you get a $10,000 raise, save $3,333 (33% of the raise).
• Why It Works: This method is straightforward to follow, especially for those struggling with more complex strategies. It’s a good starting point if you don’t have a specific retirement timeline or goal but want to build your savings consistently.

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As noted, this applies for new raises. Yes, you can battle this by lowering your expenses with budgeting too. But remember, there is 100% of expenses to reduce and an infinite amount of income to work with. This process ensures you have a system ready when your ceiling gets higher.

The Bottom Line

The key to avoiding lifestyle creep is to have a game plan in place for when your income increases. This means adjusting your new income in a way that aligns with your long-term financial goals. Whether you follow one of these three strategies or come up with your own, the important thing is to create a habit of saving more as you earn more.

You worked hard to get your raise—don’t let it slip away into lifestyle upgrades that won’t benefit you in the long term. Upgrade your life by buying your time back.

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