Lifestyle creep, or lifestyle inflation – when expenses rapidly rise to match newfound income – ensnares countless newly minted partners. Often there are underlying social pressures from peers or colleagues to keep up with new levels of conspicuous consumption. New indulgences and one-time splurges quickly become everyday necessities. It may begin innocently enough with a new car, a small remodel to an existing home, or a generous contribution to one’s alma mater, but it can quickly snowball into completely spending bonus checks before they have even been deposited.
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So, who cares? After all, you have sacrificed a lot to get where you are today and rewarding yourself for a job well done is your right. However, many junior partners have not considered what they are giving up by having their expenses match their income – namely, true financial freedom or the ability to say no. It is difficult to downshift your lifestyle, especially if you have no resources to fall back on other than your future earning potential. Make sure you do not find yourself in this situation by following these tips.
Prepare for Lumpy Cash Flow
It is important to be fiscally prepared for lumpy cash flow – expenses like estimated tax payments, firm capital commitments, and new firm sponsorship contributions, just to name a few, can potentially catch you off-guard. Without adequate planning and forethought, you can find yourself flat-footed at a very inopportune moment.
The first step to addressing lifestyle creep is to be prepared. Create a short-term cash strategy to help you avoid common cashflow missteps. Start by identifying what your major outstanding liabilities will likely be for the next 12 months. After you have identified these cash needs find a ready source of liquidity to cover them.
When reviewing your cash strategy look for potential mismatches between liabilities and cash flow, consider all your options. Be prepared to cover an unexpected expense in addition to the ones you identified. Remember alternative sources of potential liquidity that you could use to smooth over any cash crunches, such as:
- A margin loan against assets held in investment accounts.
- A cash reserve built up over the course of time specifically for these types of surprise liquidity events.
- Short term financing solutions offered by the firm.
If you do not research your options in advance, it is difficult to know in the moment what your best options is. Sometimes the terms of short-term margin loans are equal or better than terms offered to new partners from other sources sometime not – having options in place and knowing what they are is paramount to helping you address your need when it arises. Preparing a short-term cash strategy will give you a better sense of what to hold in reserves for future expenditures, what you can spend on your current lifestyle needs, and what to invest for long-term growth – allowing you to avoid the trap of lifestyle inflation.
Identify Your Goals and Values
Making conscious decisions about what is important to you is one of the most crucial steps in combating lifestyle inflation. You may really like the idea of:
- Having the option to slow down when you want to.
- Buying a vacation home to spend quality time with family.
- Providing meaningful philanthropic support to a cause you believe in.
- Being able to offer monetary support to aging parents.
There are no right or wrong choices, but you should make a choice. One of my favorite quotes is, “If you don’t know where you are going, you might wind up someplace else.” Not having your long-term goals well-defined makes it easier to succumb to lifestyle creep, potentially leaving you someplace you didn’t intend to be. Balancing short-term needs with long-term goals is a lifelong pursuit, so it is vital not to focus solely on one or the other at any given time. Clearly outlining your goals and having a financial plan in place to achieve them will help you feel comfortable living the life you want today, knowing you are going to end up where you truly want to be.
Create a Financial Roadmap
Without knowing what you are aiming at, you can miss your target and let other seemingly pressing things drain your ability to accomplish what you really want. After identifying what matters most to you, the next step is to create a financial roadmap to help guide you to your destination.
This is done through a comprehensive financial plan that considers not only your resources and liabilities, but also incorporates an in-depth cash flow and investment return projection as well. Having your plan in place will help guide you towards your goals and remind you to maintain focus on them.
To create a financial roadmap, you should gather and review information regarding:
- Partner Benefits: 401(k), deferred compensations plans, etc.
- Investment Assets: taxable and retirement accounts, physical assets, etc.
- Liabilities: existing mortgages, home equity lines of credit (HELOCs), credit cards, student loans, etc.
- Insurance: personal and group benefits – disability, life, property & casualty, etc.
- Estate Plan: current wills, Powers of Attorney (POAs), revocable and irrevocable trusts, etc.
- Tax Returns: recent returns from your accountant for reviewing income, expenses, deductions, etc.
These data points allow you to create a more meaningful individual guide to help you stay on track to reach your financial goals. As assets and income projections change, risk profiles are modified, and other aspects of your personal and financial life develop with time, you should revisit and adjust your financial roadmap to reflect your new situation and goals. Your financial roadmap is a living document that will always be there to reorient you, helping to combat lifestyle creep.
Some level of lifestyle inflation is inevitable and necessary, continuing to live like you are a first-year associate is not the answer to preventing lifestyle creep. As with most things in life, the key is moderation. The transition to partner can be a challenging one – creating a comprehensive financial roadmap that takes your personal and professional situation and goals into consideration is the best way to develop and implement a plan that will help you avoid the kind of overextension that could materially impact your ability to achieve what you really want – whatever you decide that is.
About the Author
Eric Dostal, J.D., CFP®, Vice President at Wealthspire Advisors, works extensively with clients to help them feel in control of their financial lives. Eric has demonstrated a high degree of skill developing and overseeing the investment, insurance, retirement, tax and estate planning strategies of his clients. He seeks to understand a clients’ unique financial circumstances, get them organized and on the path to financial independence.
Wealthspire Advisors LLC is a registered investment adviser and subsidiary company of NFP Corp.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. ©2021 Wealthspire Advisors.