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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’ve even been deposited.

So, who cares? After all, you’ve sacrificed a lot to get where you are today and rewarding yourself for a job well done is your right. However, many junior partners haven’t considered what they’re giving up by having their expenses match their income – namely, true financial freedom or the ability to say no. Make sure you don’t find yourself in this situation by following these tips.

Prepare for Lumpy Cash Flow

It is difficult to downshift your lifestyle, especially if you have no resources to fall back on other than your future earning potential. Also, it’s important to be fiscally prepared for lumpy cash flow – expenses like estimated tax payments, firm capital commitments, and new firm sponsorship contributions can potentially catch you off-guard. Without adequate planning and forethought, you can find yourself flat-footed at a very inopportune moment.

A financial advisor will create a short-term cash strategy to help you avoid common cashflow missteps. The strategy will give you a sense of what to hold in reserves for future expenditures, what to spend on your current lifestyle needs, and what to invest for long-term growth. An advisor can also help identify potential sources of liquidity, such as a margin loan against assets held in investment accounts, to smooth over any unforeseen cash crunch. Often the terms of short-term margin loans are equal to or better than terms offered to new partners from other sources.

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’s 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’re going to end up where you truly want to be.

Create a Financial Roadmap

Without knowing what you’re aiming at, you can miss your target and let other seemingly pressing things drain your ability to accomplish what you really want or need to. 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 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.

Your financial advisor will create your roadmap by gathering and reviewing 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, irrevocable life insurance trusts (ILITs), etc.
  • Tax Returns: recent returns from your accountant for reviewing income, expenses, deductions, etc.

These data points allow us to create a more meaningful and individual guide to help you stay on track. We then update the map as assets and income projections change, risk profiles are modified, and other aspects of your personal and financial life develop with time. Your financial roadmap is a living document that will always be there to reorient you, helping to combat lifestyle creep.

Conclusion

Some level of lifestyle inflation is inevitable and necessary, so continuing to live like you’re a first-year associate is not the answer to preventing it. As with most things in life, the key is moderation. The transition to partner can be a challenging one – working with a trusted financial advisor 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.

 

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

Eric Dostal, J.D., CFP®

Eric is a wealth advisor in our New York City office.