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

Marisa Torrieri
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For this reason, consider upping your retirement contributions by the same percentage as your raise—so if your income increased by 5%, so should your retirement contributions.

The same goes for your rainy day fund because your emergency savings target is tied to whatever your take-home pay is at the time. “If you now have less than six months of your new income, you probably don’t have enough,” Blaylock says. “So a portion of that new raise should go toward building that fund up more.”

Generally, Blaylock recommends trying to earmark at least 50% of each pay raise toward financial goals—whether it’s retirement, emergency savings, paying off your credit card debt, or socking away more for a big savings goal.

RELATED: 7 Reasons You Need an Emergency Fund

2. Remind yourself that your budget—and goals—aren’t the same as that of your friend. It may make you green with envy when you hear about your best buddy’s yearly trip to the French Riviera, but her vacation doesn’t have to be yours—and it may not be in your budget’s best interest anyway.

Remember that your big-ticket goals are uniquely yours, which means your savings strategy should be dependent on your budget and timetable—not societal pressures or competition.

But if you do want your friends’ experiences to be your own, consider working on a goal together, like a group getaway that you all take every few years. You may build stronger bonds by checking in on one another’s progress—and you may even find that you’ve become good money influences on each other.

3. Test-drive some of your lifestyle upgrades. If you’ve already covered your basic financial security and want to indulge in some lifestyle changes, consider trying before you buy by predetermining one or two upgrades that would bring you the most joy. Then do some comparison shopping to see what a reasonable cost is for such upgrades, and determine how those new expenses would impact your budget.

“For example, try pretending that you have a bigger mortgage payment and put that additional money into a savings account for a few months to see if it’s something you can live with,” Blaylock suggests. And if it turns out that you can’t live without that extra money, you’ve at least increased your savings.

“If you’re making an extra $1,000 a month, put $100 back into lifestyle. We do need to reward ourselves.”

4. Bake in some “me” money. Of course, it would be unrealistic to say that every dollar from a raise should go toward savings. “If you’re making an extra $1,000 a month, think about putting $100 back into lifestyle, if it works for your budget,” suggests Blaylock. “We do need to do something to reward ourselves.”

And remember that your flexible expenses—things like eating out, groceries and drugstore purchases—are precisely that, flexible. As long as you know what your one number is for these types of purchases, you have the freedom to spend that money however you’d like.

For instance, you can treat yourself to a fancy spa day one month, but perhaps the next month you take it easy with a less-glamorous, but equally fulfilling, dinner out. Just make sure that you recognize when you’re spending to give yourself a well-deserved treat, versus when you’re doing it in reaction to an emotional state—like going shopping to make yourself feel better after a huge fight with your significant other.

Bottom line: It’s perfectly O.K. to reap the benefits of your raise, but those lifestyle upgrades also have to be backed up with a rehashed budget and simultaneous upgrades to your financial security.

Schlossberg finally realized this when she watched a friend go through a layoff—and it dawned on her that her own hefty paycheck might not be endless. So Schlossberg buckled down three months ago and created a realistic budget—pinpointing luxuries she could actually afford, while also socking away more into her emergency fund.

“You can’t assume you’re going to stay healthy or keep your job forever,” she says. “Living with lifestyle inflation caused a lot of stress.”

RELATED: How to Splurge Right

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the people interviewed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked-to or otherwise included in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

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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.