More Money, More Problems? The Dangers of Lifestyle Inflation—and How to Avoid It

Marisa Torrieri

The Social Psychology Behind Lifestyle Inflation

Numerous studies support the notion that as incomes rise, so does the tendency to spend, not save. A Federal Reserve report found, for instance, that less than half of Americans earning between $75,000 and $99,999 saved any money whatsoever—and as many as 16% of those within that income bracket actually went into debt.

At the same time, a recent Brookings Institute study found that families stuck living paycheck to paycheck are actually twice as likely to be solidly middle class than low-income. The authors dubbed this demo the “wealthy hand to mouth,” a group that tends to be older, educated and high-earning—and yet can’t seem to get ahead.

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So why, despite our best intentions, do we often end up putting our raises toward a bigger apartment or luxury SUV before we tackle our savings goals?

For starters, we’re conditioned to always be on the hunt for more. Psychologists refer to this as the “hedonic treadmill,” or our instinctive desire for bigger, better comforts every chance we get.

“It’s human nature to want to improve one’s economic and social standing—whether that’s upgrading housing, clothing or toys,” says Brad Klontz, a CFP® and financial psychologist. “If it wasn’t, we would all still be living outdoors wearing animal skins.”

“Many spending decisions are made by our unconscious brains, which equate social standing with life or death.”

The difference is that today, instead of being spurred by survival of the fittest, we’re driven by the “Keeping Up With the Joneses” effect. It’s the need to purchase items—often beyond our means—to show we’re doing at least as well as, if not better than, our neighbors.

And the effect of this one-upmanship shouldn’t be taken lightly: One 2010 study concluded that people tend to be happier when they have more money—but only if it gives them the perception of being better off than friends and peers.

“Many of our spending decisions are made by our unconscious brains, which equate social standing with life or death,” explains Klontz. “And the further we drift from the norm in our social group, the more anxiety we feel.” Translation: Seeing that shiny new car in a neighbor’s driveway cues our brain to think that our social standing is being threatened—spurring us to spend as soon as we have the resources.

There’s also the entitlement factor, which Klontz calls the “I work hard, so I deserve to buy nice things” script. “While it’s true that it is nice to have your hard work reinforced with some indulgence, it should not come at the expense of thoughtful financial planning,” he says. “Ironically, although this belief feels like wealth in the moment, it actually perpetuates a feeling of lack.”

So while there’s nothing wrong with rewarding yourself for your hard work, one of the dangers of this behavior is becoming used to a new, more expensive normal—thus unraveling any previous discipline you may have built into your budget. Just ask Schlossberg. “It’s like when someone goes on a diet, loses weight and then can eat again,” she says. “Those luxuries soon become mandatory parts of your life.”

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  • thepixinator

    I can totally relate to this. When I was unemployed and underemployed, I spent nothing, ever, so it was easy to know where my money went. Now that I have a somewhat decent-paying job, I never seem to have enough money beyond bills and savings (at least I have the 401k and savings account deposits set up to occur automatically, so I don’t have to think about them). So, I look through my online banking account, see these little $25, $40 expenses, $60 cash withdrawals and think “That adds up to $600?!??” And yes, it does. It’s scary how quickly a person can blow through money they never even had before and not notice it.

    • V

      I found that once I started making a decent wage, that I have gotten “cheaper”! When I was making less money, I spent more freely. Now, because I am determined not to go back to being broke, I find myself weighing my costs and spending much more diligently.
      It is nice to have more disposable income, and I do find myself spending a bit more here or there, but I certainly am not frivolous with it!

  • Leighann

    I hope I have the self control to stick to these tips!! I miss my college days when I could have fun without spending a small fortune. I need to get back to that!

  • loles

    This has definitely happened to me, especially in the last year. I find myself getting off track at least one or twice a year. When that happens I go back to a cash-only diet and the enveloping method, and it always sobers me up. So much of our social selves seems to be tied to things, that it’s easy to fall in that trap. I am preparing to be very mindful of my spending now that the holidays are near, because gifts for my family and godchildren seem to be my financial kryptonite.

  • Ramakilla

    That’s why I like YNAB. Keeps me honest about where I’m spending my raises. I plan for it.