Many Australians are finding more cash in their bank accounts each payday, thanks to stage 3 tax cuts and anticipated pay rises. According to the Hays Salary Guide FY24/25, 86% of employers are planning to offer salary increases. While this extra income is certainly welcome, it’s crucial to make wise financial decisions to avoid lifestyle creep, which can hinder your long-term financial goals.
Lifestyle creep, or lifestyle inflation, happens when your spending on non-essential items increases as your income rises. This often occurs subtly, starting with small luxuries and gradually escalating to more significant expenses. While it’s natural to enjoy the rewards of your hard work, unchecked lifestyle creep can prevent you from achieving financial security.
Lifestyle creep can be so gradual that you don’t even realize it’s happening. It might begin with rewarding yourself with the latest gadget after a pay rise, eventually leading to bigger expenses like a new car. Over time, these luxuries start to feel like necessities, making it difficult to scale back.
If you find yourself living paycheck to paycheck or not seeing an increase in savings despite higher income, you might be experiencing lifestyle creep.
The primary danger of lifestyle creep is that it can derail your financial goals. Spending all your extra income on non-essential items means less money for savings, retirement, investments, or paying off your mortgage. Over time, this can cost you thousands of dollars.
For example, if you add an extra $200 from a pay rise to your $600,000 mortgage at 6.88% interest, you could save about $123,000 in interest and reduce your loan term by nearly four years. Alternatively, investing that $200 monthly with a 7% return could grow to $34,617 in 10 years.
Avoiding lifestyle creep requires conscious effort and planning. By setting financial goals, creating a budget, and tracking your spending, you can ensure that your increased income contributes to your financial well-being rather than just elevating your standard of living. At Loan + Finance Brokers, we’re here to help you manage your finances effectively and achieve your long-term goals. Contact us today for personalized financial advice.
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