Pay Yourself First and Avoid Lifestyle Creep

Two concepts in personal finance that I find the most important are: pay yourself first and avoid lifestyle creep. With summer now upon us, I realize that two days from now marks the 4-year anniversary since I moved into my apartment and began living on my own. I have come to realize in those last 4 years just how important those two concepts are in maximizing savings and financial freedom. If there were two concepts that highlight my ability to maintain such a high savings and investment rate, then they are paying yourself first and avoiding lifestyle creep.

Paying yourself first means the first thing you do is route a certain amount of your income each month into your savings and/or investment accounts with long-term objectives in mind. For some, that means directing 5%, 10%, 20%, 50% or more of their income straight into their savings. Hence, paying themselves first. It is a financial strategy with an entire budget/spending plan centered around saving for yourself first before anything else. This is something everyone should be doing.

For myself, since I built such a minimalistic lifestyle, I set my minimum at saving 50% of my income. In fact, I have managed to save over 50% of my income each month over the past 4 years. I have no fixed percentage after 50%. That is just the minimal line. So, most of my working income goes to savings and investments. Over the last 4 years, I managed to build up a portfolio currently valued at over $250,000 and generating an average of $952 per month in dividend income. Always pay yourself first guys. Save, invest, and repeat the process.

The next important concept is avoiding lifestyle creep. Lifestyle creep is when your spending increases as your income increases. Basically, as your income increases, so does your lifestyle spending (usually on material things you do not necessarily need). This, in and of itself, won’t doom you financially if you are disciplined and well versed in personal finance. For example, if you go from making $35,000 a year to $150,000 a year you can most certainly afford entertaining a higher lifestyle and still save and invest what you need for the future.

However, if you are not disciplined and/or financially illiterate, then lifestyle creep is quite dangerous to one’s financial wellbeing. The danger lies in its temptation. We are always tempted to over-consume and “keep up with the Joneses”. In fact, our entire culture is centered around that. Spending more can quickly become an addiction and you could start neglecting savings and long-term financial health.

The best tools against lifestyle creep are discipline and a solid financial strategy. Discipline is a necessary virtue in personal finance as it keeps you on track and prevents you from deviating from the course you set. Set a budget, track your finances, and build a long-term strategy. It is okay to adapt and alter plans as circumstances change, but stick to your principles going forward towards your future goals.

If your salary increases, your first thought may be that you have more to spend on things. I know several co-workers who think that way and are constantly complaining they are broke and have a bunch of credit card debt. A better financial tactic would be to deploy the extra income to pay off any debts you may have. Personally, I like the idea of knocking out debts first, but another great plan is to increase the amount you pay yourself first. If your salary increases, then increase your savings in proportion (or more).

Over the past 4 years, my salary has increased about 25% from when I first started. Yet my spending has remained remarkably consistent throughout the years. Expenses have gone up for sure, but that is mainly due to things I can’t control – primarily the rent increases throughout the years. Nevertheless, I have increased my savings each time my salary increased. Thus, my investments increased as well.

None of this means you can’t buy new or fun things. In fact, from my experience, I find that if you know how to manage a budget based on maximizing your savings you can pretty much afford anything over time.

I have bought things throughout the years. I bought a sofa, a desk, a chair, a hamper, new bed sheets, a beach umbrella (and chair), a floor mat, and some home décor. My apartment is looking quite nice now. I also bought some nice new clothes (they were not expensive, but nice). But all those items were budgeted in, even if I had to wait a couple of months (or more). And yes, I spend on the occasional night/day out (though not so much in 2020). You can still save and have fun.

I am expecting another pay raise towards the end of the year sometime. My first thought was: “Great! I could save much more now.” That is more money to pay myself first. Thus, more money to investment and put to work for me. My ultimate goal is financial independence and freedom. And even if my salary were to miraculously rise to $150,000 per year, I would not change my lifestyle. I would continue to live the minimalistic way and save and invest even more – striving to reach financial freedom even faster.

And those are two important financial concepts I find amongst the most important: pay yourself first and avoid lifestyle creep. It has been quite an experience these last 4 years. Wealth has been accumulating nicely and I am on course to achieving financial independence and freedom. The next 4 years should be even better! I will continue to build my dividend dynasty!

So, how about the rest of you? Do you pay yourself first? Do you have any strategies for avoiding lifestyle creep? Also, do you consider yourself a minimalist? Let me know in the comments below!