The more money is earned, the more money is spent – that is the case for those without adequate financial literacy. This concept is known as "lifestyle creep" and is a common problem many of today's employees face.
Lifestyle creep occurs when individuals increase their spending as their income increases, resulting in little to no savings and increased debt. A habitual pattern like this can lead to financial hardship when employees are unable to maintain their current lifestyle once their income decreases or stops.
Fortunately, employers can help reduce the risk of lifestyle creep by providing their employees with financial education and resources that help them manage their finances better.
What Is Lifestyle Creep?
If your company is structured like most others, each role will have career progression to a certain extent. Junior salespeople may become sales managers, and IT technicians may become software engineers.
As employees move up the ladder, their incomes increase too.
The problem is that most people don’t adjust to this new financial reality. Instead of saving more or investing in stocks, they start buying nicer things like cars and homes – all with the idea that they can now afford them because their income has increased.
This destructive pattern of spending money as soon as it comes in is called “lifestyle creep” or “lifestyle inflation,” and unfortunately, it can cause serious long-term financial issues if not addressed properly.1
Consequences of Lifestyle Creep
Since lifestyle creep gives the impression that one's life is improving, it's easy to dismiss the potential consequences it can have.
Your employees might not realize what they are doing until it's too late.
Some of the key consequences of lifestyle creep are:
- Increased debt. As your employees spend more, their debts will inevitably increase too – especially if they over-commit with loans and credit cards under the guise of having limitless money.
- Difficulty saving. Without proper financial planning, your employees will find it difficult to save money and may even dip into their savings to maintain their lifestyle.
- Low retirement funds. The more money is spent on current wants, the less will be available for future needs like retirement or a child's college education fund. This can lead to serious financial issues in later life.2
- Anxiety and stress. Money issues can cause serious anxiety and stress if the employee is unable to maintain their lifestyle once income decreases or stops.
The issue with lifestyle creep is that no one can guarantee their income will remain the same.3 Unexpected events such as job loss, an economic downturn, or health issues can lead to income reduction or even a complete cut-off.
When this happens, it could be too late for employees to adjust their lifestyle, and they may already have racked up significant debts that need to be paid off.
How Employers Can Help Reduce Lifestyle Creep
The good news is that employers can help reduce the risk of lifestyle creep by educating their employees on financial planning and providing access to resources that can help them manage their finances better.
Why does this concern you as their employer? Well, when employees are financially secure and in a good place, they'll be more productive and engaged at work.
If your employees are spending their time worrying about money issues instead of focusing on their job tasks, it could impact the team's performance as well.
So how can employers help?
Be Clear and Upfront About Career Progression
Be clear and upfront about the career progression path for your employees.
Make sure they know what it takes to get promoted and how much more money they can expect once they reach a certain level. This will help them set realistic goals in terms of their finances rather than splurging on items that won't lead to long-term financial stability.
While employers cannot necessarily guarantee progression or stability, be as upfront as possible about whether an employee has a good chance of reaching a certain level in the organization.
Encourage Proactive Financial Planning
Educate your employees on financial planning and provide access to resources that can help them manage their finances better. Make sure they know what it takes to establish good credit, open savings accounts, invest money wisely and save for retirement.
In doing so, you'll help them make sound decisions with their money so that they don't have to worry about lifestyle creep.
Offer Benefits and Savings Plans
Offer benefits and savings plans that can help employees save money in the long term. This could include things like health insurance, 401(k) matching plans, flexible spending accounts (FSAs), 529 college savings plans, and more.4
These types of programs will not only encourage employees to save for their future but also give them a sense of security, knowing that if something unexpected comes up, they have some kind of financial cushion.
Give Employees Access to Financial Planning Services
Make sure your employees know about any financial planning services you offer through your organization or through partnerships with outside firms.
Having access to these services can help employees understand their financial situation better and make wise decisions with their money.
Lifestyle creep can be a big problem, but employers can take steps to help reduce the risk of it happening.
By educating your employees on financial planning and providing access to resources that can help them manage their finances better, you'll give them the tools they need to stay financially secure for years to come.
The Importance of Financial Wellness
While employers can take steps such as offering benefits and savings plans, financial wellness is the only sustainable way to help employees avoid lifestyle creep.
To that end, employers should foster an environment of financial wellness by providing advice and resources on budgeting, saving, investing, debt management, and more.
Financial wellness covers a broad range of topics, including but not limited to:
- Understanding basic finances
- Creating a budget
- Building an emergency fund
- Managing debt
- Investing in the stock market
- Planning for retirement
Employers don't always have the time and resources to convey these topics, however – which is where Enrich can help.
Offer A Financial Wellness Program To Employees With Enrich
Enrich is dedicated to empowering the next generation of employees by equipping them with the financial literacy skills they need to make informed decisions and avoid lifestyle creep.
The holistic financial wellness program includes a range of resources and tools, such as online courses, budgeting tools, and financial counseling services, all designed for employees at risk of lifestyle creep.
The program is flexible and can be tailored to meet the specific needs of your employees.
Don't leave the future financial well-being of your employees to chance. Equip them with the tools they need to succeed. To learn more about how Enrich can benefit your organization, request a demo today.
1 - https://www.npr.org/2022/07/13/1111300716/lifestyle-creep-definition
2 - https://www.annuity.org/personal-finance/lifestyle-creep/
3 - https://www.clearviewfcu.org/Resources/Learn/Blog/What-Is-Lifestyle-Creep-and-How-Can-I-Avoid-It
4 - https://www.investopedia.com/articles/personal-finance/092313/how-manage-lifestyle-inflation.asp