How to spend and save smarter as your salary grows
Are you earning more but still feel like you’re not getting ahead? ‘Lifestyle creep’ could be at play. We explore how to build long-term financial security while still enjoying the nicer things in life.
You’ve had a pay rise and your bank balance looks healthier; so why doesn’t it feel like you’re getting ahead?
In The Psychology of Money, author Morgan Housel tells the story of Ronald Read, a caretaker and petrol station attendant, who lived modestly his entire life, chopping firewood and living in a two-bed house. When he died at the age of 92, his net worth was $8 million. This wasn’t the result of a lottery win or inheritance, but from living within his means and investing consistently. His story proves that wealth isn’t just about how much you earn – it’s about what you do with it.
If you’re earning well but struggling to build savings, you might be one of the HENRYs – “the High Earners, Not Rich Yet” cohort. HENRYs are typically in their late 20s to early 40s, who earn six-figure salaries but have surprisingly low savings.
Why? While rising rent, higher taxes and childcare costs can play a big role, there’s another reason: “lifestyle inflation”, sometimes called “lifestyle creep”.
What is lifestyle inflation – and why is it a problem?
Lifestyle inflation happens when you spend more as your salary rises, and former luxuries start to become everyday essentials. You might start shopping at the nicer supermarket, upgrading your tech and saying “yes” to more dinners out.
It’s natural to feel like you’ve earned those extra treats, but here’s the catch: if every pay rise leads to more spending, your financial future doesn’t actually improve. Lifestyle inflation makes it harder to build your savings or invest for the long term. This can leave you feeling stuck – because even with a higher salary, big goals like buying a home or retiring comfortably remain out of reach.
The good news? Tackling lifestyle inflation isn’t about cutting out all the fun – it’s about making intentional choices that align with your priorities.
How to tackle lifestyle inflation
1. Create a budget that works for you
A budget gives you control and clarity. It shows where your money is going and helps you set limits before “little upgrades” creep in unnoticed.
There are lots of different ways to budget. One method is the 50/30/20 rule, which can be great for those who like tracking their expenses and following a guideline on how much to save and spend.
The idea is to budget 50% of your take-home pay for your needs (like rent, bills and groceries), 30% for your wants (like eating out and holidays) and 20% for your savings and investments.
If those percentages don’t feel right, you can choose a breakdown that works for you. If you love good food, budget for it. If travel lights you up, plan for it. The key is to be intentional, rather than letting spending become automatic.
Whichever method you choose, a budget can help you enjoy yourself today while building for tomorrow.
2. Set clear financial goals
Saving can feel a lot more motivating when you know what you’re working towards (and a lot more satisfying when you achieve that goal). Goals can also help you make more informed financial decisions.
Your goals may include:
- Short-term goals: like saving for a holiday, paying off a specific debt or building an emergency fund.
- Medium-term goals: such as saving for a deposit on a house or funding a major purchase.
- Long-term goals: retirement or funding your children’s education.
If you're working towards a goal that's less than three to five years away, a cash savings account can be a smart choice. Cash is lower risk, so you won't have to worry about your money falling in value just before you need to use it. However, it might not keep up with inflation, which is the rise in prices for goods and services over time, meaning your money buys less than it used to.
For longer-term goals, investing gives your money the opportunity for greater growth over time, helping you reach your goals faster. Although investments can go down as well as up, history shows that shares have delivered better returns than cash over long periods.
3. Make your money work harder
You don’t need to live like Ronald Read, but his story shows that investing, even just small amounts, can significantly help to build your wealth. Our calculations show that investing just £100 each month could grow to just over £80,000 after 30 years, assuming a hypothetical annual return of 5% after fees. If you double your monthly contribution to £200, your investment could reach around £163,000 over the same period.
It’s easy to fall victim to lifestyle inflation – after all, the reason most of us work is to enjoy life. But building wealth (and ultimately having a better quality of life) is about more than just earning more – it’s about managing your money wisely. By budgeting, making sustainable lifestyle changes and investing where possible, you can enjoy your earnings without compromising your future.
So, the next time you get a pay rise, celebrate – but also set yourself up for future freedom. A little planning and discipline today can make a big difference tomorrow. Your future self will thank you.
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Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
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