Three Steps to Avoid “Lifestyle Creep” as You Prepare for the New Year

One of the easiest ways to stay on a solid financial path is to intentionally avoid lifestyle creep, which happens when our spending increases with our income, but our savings stays stagnant. If we’re blessed to receive a raise at year-end, we can easily absorb those extra dollars into our spending. As this happens year over year, the impact compounds and we find ourselves wondering why we’re saving so little compared to our income. Making up for lost time when it comes to long-term savings can be a bear. Thus, taking steps to avoid this creep has a massive impact on our financial futures. Here are a few small changes to consider making now:

1. Start Savings “Buckets”

In working with our clients, we’ve seen how having more than one savings “bucket” can bring positivity to the dread of cash flow planning. We are all familiar with the concepts of emergency savings and retirement savings, but what if you added in vacation savings or home project savings too? These are easy ways to implement cash flow planning as you enter January. Talk to your bank or credit union about opening a few new accounts (with no fees) and name them. Then you can easily set up $50, for example, to go automatically to your “home project savings” from your primary checking account every month. Before you know it, you’ll have several hundred dollars designated for a home project that won’t need to come from your primary checking account, and you’ve kept yourself from accidentally spending that $50 a month at Panera.

2. Make Changes to Your Employer Retirement Plan in December

Bump up your employer plan contributions, and don’t wait until January to make a change. Whether you have a 401(k) or a 403(b), your employer plan may only allow you to make paycheck contribution changes a few times a year. Meaning, if you wait until your income increases in January, you may be too late. By the time the next change window opens, it may be off your radar.

If you’re contributing a dollar amount in addition to bumping up the amount, consider switching to a percentage so the amount will increase every year with your income. Also, check to see if your plan allows for annual automatic increases. You may be able to set contributions to increase by 1 percent every year until they reach a certain percentage—say 15 percent. This can be a great “set it and forget it” option.

3. Max Out Your HSA for 2019

A health savings account (HSA) is a tax triple play that allows individuals or families participating in a High-Deductible Health Insurance plan to save for medical expenses in a tax-advantaged way. There are several strong reasons to contribute to an HSA. Ask your financial planner or human resources if you have questions, but the bottom line is generally this—if you have access to contribute to an HSA, max it out if possible. For 2019, individuals can contribute $3,500, while families can contribute $7,000. Contributions come through your paycheck, thus they’re spread throughout the year. Starting or increasing contributions is a great way to avoid “the creep” while setting funds aside for future medical expenses—especially the unexpected ones.

Avoiding lifestyle creep is one of the most painless ways to stay on a firm financial footing, but it takes intentionality. This month is the perfect month to get started!