Lifestyle Inflation: More Money, More Problems

Don’t let a promotion or pay raise set back your retirement saving

By Matt Smith


When you get a raise, it’s only natural to want to reward yourself. After living on a limited budget, it can be a relief to allow yourself to relax a bit and stop scrimping all the time. But, while there’s nothing wrong with splurging here and there, it’s easy to fall into the trap of “more money, more problems.”

“Lifestyle inflation” is the term for this phenomenon, and it’s what happens when your spending increases as your income goes up. Lifestyle inflation can quickly become a dangerous cycle that makes it difficult to save money and pay down debt. Purchases that may seem within your budget can jack up your cost of living in unexpected ways—it’s easy, for example, to forget about the added expenses that come with buying a new home.

Often, a raise isn’t as significant as it may seem at first. Congratulate yourself, but before making any big purchases, be sure that you’ve done your homework. How will your new paycheque actually affect your finances? Be sure to calculate the difference in income after taxes, and take into account how your new salary may affect you during tax season.

One of the best ways to avoid the pitfalls of lifestyle inflation is simple: pretend you didn’t get a raise. Instead of spending all that extra cash, stick to your pre-existing budget. Take what’s left over and deposit it in a savings account or use it to pay down debt. Keep track of the added income over the following weeks to better understand how the raise actually affects your financial situation. Use this time to reflect on and plan your next big financial moves.

Always aim to pay yourself first—prioritizing retirement savings, investments, and dealing with debt. If you do plan on making changes to your monthly budget, remember that smaller, more gradual adjustments will be more sustainable than drastic ones. Avoid taking on new debt, and don’t let your newfound wealth trick you into losing sight of your financial goals.

Don’t feel the need to keep up with the Joneses: spend time with friends who have similar budgets and if you feel the need to splurge, consider prioritizing vacations, classes, and other things that will enrich your life and provide lasting memories rather than lock you into further cycles of spending.

Photo: iStock.