Helping Clients Avoid Lifestyle Creep

Alex Wilson, CFP®, BFA™, is a financial planner, financial coach, and student loan expert at SmartPath Advisors. She serves as the 2020 NexGen director for FPA of Georgia.

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Lifestyle creep can affect anyone. As clients start earning more money, they tend to raise their standard of living as well. It seems like a natural progression at the time, but compounded over the years, they can find their spending out of control, debt accumulating, and limited savings to their name.

Once a level of spending has been ascertained, it’s hard to scale back. Standard of living increases impact clients not only in the short-term but also increase their need for retirement savings.

Many of my clients are recent medical school graduates in the first years of their residency. They might be making $60,000 now, but within a few years, they will be making $200,000 to $500,000 plus. When working with clients like this, my main focus—outside of their six-figure student loan debt—is to help them practice good money habits. I help them achieve these habits through financial education, coaching, and accountability.

Identifying Bad Habits

On the first few calls with a new client, I dive into their day-to-day finances and see where they are now. I can get a good sense if a client is at risk for lifestyle creep by asking if they are saving a regular amount each month, or if they have credit card debt that was not the result of a significant expense that was outside of their control. This helps me determine if they already have poor spending habits and are spending more than they make. Together we make a spending plan, discover a way to track their cash flow that works for them, and see if there is room in their current cash flow to begin funding an emergency savings account.

If my client is spending more than they make each month, they will probably have credit card debt. Once they get a raise, based upon previous behavior patterns, they’re most likely going to increase their standard of living again—producing more credit card debt. A client making $50,000, but living a $70,000 lifestyle, is just as likely to live a $140,000 lifestyle when they make $100,000.

Teach Good Financial Habits

No matter how much a client currently makes, it’s the perfect time to teach them good financial habits, such as how to spend according to their values and within their means.

To avoid going into debt, the client must spend less than they make every month. Spending plans (budgets is sometimes a dirty word) are a useful tool for this, but the client has to follow and track it, which is not always easy.

I use Google Sheets to guide clients through tracking changes to their spending history over time. I show a breakdown by percent change, frequency changes, and the total spent by category. Showing changes to each category as a percentage helps show the magnitude of changes over time, and I can compare it to standard inflation metrics. By diving into changes in frequency, I can identify if they are doing something more often than before—such as eating out or making more shopping trips. The goal of doing this is to bring awareness to their changes in lifestyle.

Regularly Check In

For most clients, I check in quarterly to see if any changes are needed. I have the client take the lead on deciding if something needs to be changed. My responsibility is to guide them through making these decisions based on their values and what they want to do with their money. I can also bring awareness if they are behind on a savings goal, not making as much progress on their debt as they wanted, or are adding to debt because they are spending more than they make.

If a modification is necessary, I guide the client to set a goal and actionable next steps to take over the next quarter. That might be eating out twice a week instead of five or auditing their subscriptions.

I set the expectation with clients that they should request a meeting with me if there is any change to their income. When they get a raise, I advise them to save a portion of it automatically between retirement, emergency savings, and a sinking fund. I typically recommend that they make the savings automatic through payroll or transfers at their bank. Whatever is left, they can use to increase their standard of living. This should be a gradual increase, not a massive jump. I bring the client back to the percent change by category in their spending plan for context.

Accountability cannot be done through annual check-ins. I might need to meet with a client once a quarter, or even monthly for some time. The time between meetings with a client can increase over time, but I don’t jump to semiannual check-ins too soon. Teaching a client to think strategically and act intentionally takes time, but this is how I help show them how to lay a good foundation with their money.

The most impactful thing I can do for my clients is to hold them accountable to not increase their lifestyle drastically when they get a raise. Not only will they be able to save more, but I am also teaching them mindfulness and thinking strategically—a useful tool in more areas of their life than just with their money.

This article appeared in the March 2020 issue of the FPA Next Generation Planner. Want to write for the FPA Next Generation PlannerEmail NGP. Access the FPA Next Generation Planner via the FPA Publications app in the Apple App Store or Google Play.