Humans are naturally inclined to prioritize instantaneous gratification to fulfill current wants, which leads to financial decisions that don’t support future needs. A theory that proves this is the Hedonic Treadmill, which states that levels of happiness adapt despite positive or negative life events. As goals are achieved, expectations rise; therefore, increased effort is required to maintain similar levels of satisfaction.
An example of this is known as “Lifestyle creep”, a hidden financial trap that will likely end in financial instability. “Lifestyle creep” or “Lifestyle Inflation” is the concept that the increase in income is directly correlated to the increase in spending. This tendency to increase your spending as your income rises makes it difficult to save, invest, or get out of debt. Instead of saving the extra money from a raise, people often unconsciously recalibrate their budgets to support a higher standard of living. Some of the ways lifestyle creep appears include upgrading vehicles with larger monthly payments, luxury travel, and buying more expensive homes, changing the original plan due to an increase in income, higher mortgage payments, property taxes, and insurance.
So how can clients enjoy these income increases without overspending? Setting a realistic budget and sticking to it is a good start. Many times, creating the budget or reviewing it leads them to the realization they don’t know how they are spending their money. Another way is to save in different accounts, diversifying their cash flow and taxation options. They don’t have to make large changes but small adjustments you make now can significantly improve your long-term financial life. Clients who increase their retirement contributions, even in small increments, are likely to see very little change in everyday life and are being proactive to prepare for a more comfortable future.
Cash flow analysis
As part of the ARC’s comprehensive financial planning process, we provide cash flow analysis that not only focuses on income and investments but also identifies spending patterns and savings opportunities and creates a clear picture of cash flow on a day-to-day basis creating accountability. Cash flow analysis is not just about creating a budget but also about ensuring this foundational plan supports current and future goals.
- Accelerating debt repayment, not accumulating more debt, even if income increases.
- Eliminate unnecessary recurring expenses.
- Identify if client's lifestyle is sustainable, especially if approaching retirement.
The goal isn’t to spend less, it’s to spend with purpose. Earning more income creates greater financial opportunities. By understanding cash flow, clients know where their money is going and gain greater confidence in their financial decisions.
Contact ARC at fpoperations@wealthcg.com to discuss how we might be able to support you and your clients.