Why lifestyle creep can cause HIFIs to spend ‘every cent they make,’ according to a financial planner

HIFIs often live “out of step” with their means, spending more than they earn instead of directing funds toward long-term wealth-building strategies, said Natasha Knox, founder of financial planning and wealth management firm Alaphia Financial Wellness.

“They’re spending every cent they make, and not setting aside a dime,” she said, adding that many HIFIs seek out her services. “They’re not feeling secure because, on some level, they know that something’s wrong.”

Inflation and the rising cost of living in the US are partially to blame for HIFIs precarious financial situation. Inflation rates are double what they were 10 years ago, according to the Bureau of Labor Statistics. The consumer price index for US cities, which assesses the cost of living, also rose by about 8% in the last 10 years.

HIFIs’ spending psychology comes from wanting to belong

Knox said that there’s often a disconnect between how much money HIFIs make and how much they can afford to spend.

For example, Knox said many people base their spending on their gross income but don’t take into account how much of their paycheck goes to taxes, a 401(k), or major bills like rent and groceries.

HIFIs also tend to overspend when they receive a bonus at work or other financial windfalls. She said she has seen clients allocate their bonus to multiple major purchases — sometimes spending the money “three times over,” she said.

“We all have ways that we give ourselves permission to adapt our lifestyle, the things we say to ourselves,” Knox said.

Much of HIFIs’ spending psychology comes from wanting to belong, Knox said. People want to be able to afford the same clothes or concert tickets as their friends and family, so they keep spending money.

Knox added that people’s desire to fit in with particular groups, and to feel wealthy, can lead to long-term lifestyle creep.

Small spending changes can boost future wealth

Many people underestimate how much small spending changes can impact their overall wealth, Knox said. Many HIFIs she works with aren’t in debt, but they also don’t put enough of their earnings into their savings account.

HIFIs should consider how much they need to reach their retirement goals and pay for major purchases, along with saving money for emergencies or unexpected expenses.

“It’s not that they need to have more income, it’s that they need to calibrate their spending to be within their income in order to save,” Knox said.

Although saving money can seem daunting, Knox said that small, everyday spending decisions can make a significant difference for HIFIs’ wealth over time. For example, people can still spend money on clothing, travel, and social activities — but they should set budgets and closely track their spending. She said she works with clients on ways they can make decisions that aren’t financially detrimental but still allow them to enjoy their lifestyle.

“I think most people really underestimate how wealth can or how assets can accumulate bit by bit,” Knox said. “And, on the flip side, small reductions in overspending can make a meaningful difference.”

Are you a HIFI? Do you struggle to afford your lifestyle, even with a high income? Are you open to sharing your story? If so, reach out to this reporter at allisonkelly@businessinsider.com.