How to manage lifestyle and tax creep
Stienemarié Bonsma-Potgieter, CFP® – Financial Planner
Have you noticed a pattern in increased spending as your income increases? This subtle increase in spending is known as lifestyle creep, and it can quickly derail your financial progress. Alongside it, tax creep occurs when higher earnings push you into a higher tax bracket, leaving you with less disposable income. While these changes seem small, they can add up and erode your wealth over time and if left unchecked, they may lead to significant financial challenges. Let’s explore how to spot these issues and how you can balance a comfortable lifestyle whilst still achieving financial goals.
Signs and Impact of Lifestyle and Tax Creep
Lifestyle creep often sneaks up on you and takes full effect over a period of time. You get a raise and decide to upgrade your car, eat out more often or take more expensive vacations. Before you know it, your monthly expenses have increased to match your higher income. Tax creep, on the other hand, happens when inflation or a pay increase pushes you into a higher tax bracket, meaning you have a higher tax liability. The result is that you may feel like you’re earning more, but your financial freedom stays just out of reach as your spending has actually increased but your savings are stagnant.
How Lifestyle and Tax Creep Reduce Net Income
Both lifestyle and tax creep have one thing in common—they reduce the amount of money you have left to save, invest, or pay off debt. When your spending rises with your income, you have less to put toward your future. As taxes take a bigger bite out of your paycheck, it becomes harder to reach those important financial milestones like building an emergency fund, saving for retirement or achieving financial independence.
Strategies to Manage Lifestyle and Tax Creep
The good news is that you can manage both lifestyle and tax creep with a few smart strategies:
- Awareness: The first step is to be cognisant and to regularly review your lifestyle to be able to spot if you may be living above your means to uphold a certain lifestyle.
- Avoid “Keeping up with the Joneses”: Stay focussed on your financial situation and goals and don’t compare or try to keep up with friends, family or even what you see on social media.
- Stick to a Proper Budget: Regularly review your budget to ensure your spending aligns with your long-term goals, not just your current desires.
- Set Clear Savings Goals: Prioritize saving and investing a portion of any salary increase or bonus you receive. Try increasing your savings rate each time your income rises.
- Invest in Tax-Efficient Accounts: Make the most of tax-friendly investment accounts like Tax Free Savings Accounts, Retirement Funds and Endowments to grow your wealth while minimizing taxes.
- Maximize Tax Deductions and Credits: Ensure you’re taking advantage of all available tax deductions and credits to reduce your taxable income and keep more money in your pocket.
Being aware of lifestyle and tax creep is the first step to preventing financial pitfalls. Small, incremental changes in spending and taxes may seem harmless, but over time, they can seriously affect your road to financial freedom. By being aware of these dangers, sticking to a budget, setting clear savings goals and using tax-efficient strategies, you can stay on track and maintain your financial health—no matter how much your income increases.