Lifestyle creep is a popular personal finance boogeyman, and for good reason. If you’re not careful, your expenses will increase in lockstep with your income and you’ll never get ahead.
But did you realize that you can use the same principles to supercharge your retirement (or other) savings? It’s really quite easy.
Here’s how it works… Let’s say that your currently saving (and investing) 5% of your salary for retirement. It should really be more than that and you know it, but you just can’t seem to find the money in your budget.
For now, I’ll ignore the fact that you probably could find more money for saving and/or investing in your budget if you really tried. Instead, I’ll tell you the secret to growing your contributions painlessly over time:
Whenever you get a raise, split it between you and future you. So if you get a 3% raise, bump your savings rate from 5% to 6.5% and let the rest flow into your budget.
Running the numbers
Let’s say that you’re earning $50,000/year and saving a measly $2,500 (5%) of that for the future. When you get that 3% raise, you’re now earning $51,500/yr and your new 6.5% savings rate would mean that you’re now saving just under $3,350/yr.
But look at that… Your “spendable” dollars (ignoring taxes for simplicity) have still increased by $650. Not bad, huh?
Now let’s say you get another 3% raise the next year. You’re now making just over $53k/yr and your new 8% savings rate would mean that you’re saving just under $4,250/yr. And yet your “spendable” dollars have increased by another $650 or so.
Now let’s say that business is good and you’re uber-productive, resulting in a 5% salary bump. Your new salary is just shy of $55,700/yr and your new savings is 10.5%, resulting in retirement savings of just under $5,850 for the year. But still, your “spendable” dollars are now roughly $2,350 higher than at the start.
Note that you can achieve something similar based on dollars amounts instead of percentages — e.g., split that first raise $750/$750 between you and future you, and so on. However, you’ll get further faster if you base it on percentages.
And yes, I’m aware of the problems of the problems associated with taking the percentage scenario to the extreme. Your spendable income will eventually start heading south as your percentage toward saving continues to grow. Taken to the extreme, you’ll eventually reach 100% for future you with nothing left for today.
Given the above, it should be obvious that this isn’t meant to be a firm rule that you’re expected to follow forevermore. Rather, it’s meant to jump start your savings and get you into the habit of investing without gutting your current lifestyle.
While the numbers will vary with the specifics of your situation, the larger point still stands. You’ll never miss that money if you don’t give yourself a chance to get used to it in the first place. And over time, this sort of thing will make a huge difference in future you’s standard of living.
To increase your odds of success with this strategy, I would highly recommend automating your investments. That way you just have to tweak your 401(k), IRA, or whatever contributions when you get a raise and then let nature take its course.
Investment creep. Give it a try. You have nothing to lose and a lot to gain.