Addressing Lifestyle Creep with Your Kids
One of the most rewarding facets of financial success is what you can provide for your children. And when it comes to giving to kids, the most dangerous instances aren’t necessarily material things. For many parents, drawing limits on toys, games, electronics, and clothes can be easy, especially when you see stuffed closets and playrooms filled with the latest…everything.
But what about activities, events, and lessons? Participating in sports teams, taking dance classes, investing in art lessons, or riding lessons are all things that can be hard to say no to. They build skills, character, and confidence. And your kids enjoy them. So how do you establish the concept of balance so that kids understand that these things are to be appreciated and enjoyed but that they may not be a permanent aspect of life?
Teaching kids about lifestyle creep is a great start. You want to convey three primary values:
Finances have ebbs and flows, and while the core things are always secure, some things are dependent on financial "high tides"
What other families do has nothing to do with what your family does. You decide as a family and as individuals what works for you
There may be times when trade-offs have to be made, and as a family, you may want to prioritize family events over individual goals
Understanding Lifestyle Creep
As we move through life and become more successful, things that used to be luxuries can become necessities. This isn’t always a bad thing, and it’s important to distinguish a rising standard of living from true lifestyle creep. Being able to afford more expensive things and having more financial security are normal healthy parts of your financial journey.
As you progress in your career, you'll often see decreasing debt and increasing compensation result in more disposable income. This may not be a permanent situation. The boost in income you see in your career's early and mid stages may not continue. Most people reach a plateau. This can be for many reasons:
Reaching the high point of a career/earnings trajectory for a given level of education or experience
Deciding that the trade-offs of constant work to keep income rising isn’t worth the cost to other areas of life
Deciding to retire early or switch to lower-paying but more gratifying work
The temptation to spend extra income now, instead of salting it away in savings and investment accounts, can mean that you have fewer options later in your career. We’ve addressed lifestyle creep – and how to avoid it in your overall lifestyle – in a previous blog.
Help Your Kids Create a Good Money Foundation
Kids don't intuitively understand money, but they do understand transparency. When you are open with them, it can help them understand what things cost and make it easier for them to appreciate trade-offs.
Involving your kids in your family finances can start even with young children by letting them see you make choices when you spend money.
If you use a grocery store app, let them keep track of the coupons you select, the store brands you buy, and the amount of cashback you get on every receipt
Be open about discretionary purchases – when you go out to eat; when you choose to eat at home; and the differences in cost
Let them see you pay bills – they don’t have to be involved in the actual process (kids can say the darndest things to everyone, and no one needs to know your business); they need to be aware that you pay for the things they enjoy
As your kids get older, you can introduce financial concepts like the positive and negative sides of interest. Saving in a bank account vs. racking up huge interest charges on a credit card is a lesson that is easy to demonstrate and has a big impact.
You can also introduce delayed gratification and goal setting, like putting aside part of their allowance for a special purchase and saving monetary gifts from relatives into a bank account.
Involve Your Kids in Family Decisions
As kids become more sophisticated with understanding money, get them involved in family money conversations. Explain that you have additional income this year but be careful not to scare them that there may be bad years. You can provide basic details – for example, that your company did well or you got a promotion, so income is higher or that you paid off a car, so expenses are lower.
Walk them through what you'll do with the extra money – so much of it goes to retirement savings, a part of it goes into their education accounts, and you put some toward a family goal like a vacation. After that, some of it pays for extra fun things, like traveling sports teams or additional dance classes.
This sets the groundwork for explaining that if expenses were to increase or income was to decrease, savings goals and family events would take precedence over individual things.
You may be surprised at their desire to put goals and family above fun.
The Bottom Line
Giving your kids the extras provided by additional discretionary income while they are growing up is one of the reasons you work hard. But ensuring that you are creating balance and inculcating solid money sense is a gift that will benefit them for their entire lives.
Brandy Branstetter, CFP®