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

Marisa Torrieri

Living the Good Life: How to Keep Lifestyle Inflation in Check

Many of us fantasize about what we’d do if we got a big pay bump—and more often than not, it usually entails picturing ourselves unwinding for a week in Bora Bora, buying a second home in the country or finally get that sporty car.

But it’s also common to feel like a higher salary means you can automatically take on higher recurring expenses—whether it’s swapping out basic cable for a premium package, or moving from a one-bedroom to a two-bedroom apartment.

David Blaylock, a CFP® with LearnVest Planning Services, sees the damaging effects of lifestyle inflation all too often. “People need to be cautious with raises and long-term changes,” he says. “If you want to eat out a little extra, that’s fine. But if you want to take on a [higher] car payment, that’s a whole other thing that you need to carefully consider—and budget for, regardless of your income.”

RELATED: 6 Times We Tend to Overspend (and How to Stop)

And then there’s what Ashley Feinstein, a New York City–based money coach, calls the “CVS/Duane Reade effect,” or the tendency to feel like you don’t need to track day-to-day little buys now that you’re reeling in more. Three-times-a-week sushi lunches? Sure! Treats for the kids each and every time you go to the store? Why not!

And Feinstein should know—much of the five-figure bonuses she used to rake in as an investment banker slipped through her fingers on impromptu, and seemingly minor, purchases.

People with high incomes often fall into this trap because they have money in retirement and emergency savings, so they don’t feel the need to increase working on financial goals.

“It wasn’t really any one thing, [the money] just sort of trickled away,” she says. “One day, I realized, ‘I don’t like this job, but I can’t afford to leave because I don’t have any substantial savings.’ ”

But while the stress of working harder, societal pressures and the lure of shiny new toys all may seem to be conspiring against you, it is possible to deflate lifestyle inflation—and it can boil down to four money to-dos.

1. Keep financial goals at the top of your priority list. Whenever you get a raise, you’re more likely to think, “Hawaii, here we come!” rather than, “Hey, I get to save more for retirement!” Before you know it, you’ve mentally diverted that 3% raise to a 3% hike in dining out, your shopping budget and your travel spending.

People with high incomes often fall into this trap because they already have some money in retirement and emergency savings, says Blaylock, “so they don’t feel the need to increase working on financial goals since they’re already somewhat covered, and any extra earnings is viewed as ‘fun money.’ ”

But an uptick in income can be a prime time to rethink your nest egg, especially since your retirement goal is often pegged to a percentage of your pay. A general rule of thumb is to aim to replace about 85% of your current income in retirement—which means you’ll need to sock away more toward retirement with each pay increase.

RELATED: Checklist: I Want to Set Financial Goals for Myself

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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.