Income Rising? How to Balance 'Lifestyle Creep' and Savings

In a recent column on lies we tell ourselves when investing for retirement, I mentioned that as your income improves, your lifestyle choices may become more expensive as well.

A nicer car befitting your station as a dentist isn’t necessarily a bad thing, nor is a bigger house or nicer office space as your income gradually improves; that nice office space may even drive additional revenue. My point in the earlier column was that earning more doesn’t always equate to having “extra” funds to set aside—a common misconception for investors planning to save more in some distant future.

But it’s also perfectly natural, and even healthy, to engage in some measure of lifestyle improvement over the course of your life and career. The key is to be aware of this trend as you budget and save, and to be honest with yourself about what your current and future priorities are.

Earnings and Spending

Part of the reason most economic experts decry “lifestyle creep” is because of the difference in control most people have over two key components of their financial situation: earning and spending. Depending on your dental practice, and whether you work for a health system or own or share a partnership in a practice, your earnings may fluctuate a bit from year to year. A typical dentist may be paying off debt for the first few years, buying into a partnership shortly after that, and earning significantly more in their late 40s or early 50s.

Unless you’re in some sort of fee-for-service arrangement, you’re likely to have significantly more control over your spending on a daily, weekly, and monthly basis than on your income. Curbing spending, then, in favor of saving, is often a more promising avenue than simply trying to earn more.

Spending, though, has its positive and negative aspects. Spending just to spend, buying new and better products and services just because we can, and spending beyond our means are all hazards. Not spending at all, however, can be discouraging. The austerity that comes from drastic saving, when it comes at the expense of current joy, can make saving for retirement seem like a slog at best. Who wants to engage in a slog for their entire career? Life is happening right now all around us, and living like a pauper now for some theoretical enjoyment once you’re retired doesn’t sound like a panacea.

Investing vs. Saving

These two terms are often contrasted in financial literature, but in this case I’m not talking about the difference between growing your money and simply stashing it away. Rather, I’m referring to the choice you may face if you run your own dental practice or are part of a partnership: if you have more income, do you “save” it for retirement, or “re-invest” it in your practice, perhaps to upgrade equipment, hire additional staff, or seek other improvements. There are many variables to these decisions, and the decision will depend on your goals and circumstances. The key is to carefully analyze the risks and potential benefits in both approaches before making any impulsive decisions.

Find Your Balance

The key in all these decisions is to find the right balance for you. It won’t be simple. There are too many factors at play to simply plug numbers into a spreadsheet, measure the daily happiness of having X dollars to spend every month, and then assess that measurement against the future benefit of having a secure retirement.

To help find your balance, stick to the basics: Set your financial goals after a great deal of thought and planning; build a great budget and stick to it; and consider both short-term happiness and your future.