Beware of Lifestyle Inflation: When Making More Money Can Put You In Debt

I remember when I first moved to New York City and had to deal with the shock of paying an insane amount of money to live in a 400 square foot apartment and the pressure to look like a chic NY model on a tiny income. I had to be hyper aware of my spending and go without many of the luxuries (aka Louboutins) that my friends enjoyed – until I started working in nightlife and saw some real money come rolling in. It could have been easy for me to upgrade to a bigger shoebox, take taxis instead of walking and buy myself some high end things – but I was lucky that a tiny internal frugal voice of reason kept me in check (and in my tiny Brooklyn apartment) until I had created the financial stability that would allow me to start making small upgrades.

We have all experienced the effect of coming into a bigger paycheck. Whether it’s going from your retail minimum wage job in high school to earning a real salary or getting a raise and promotion at your company – it’s difficult to not change your spending habits when you feel like you deserve it. The problem is, once we get caught up in this new lifestyle it’s easy to overextend ourselves. Pay attention – here’s how to avoid becoming a victim of lifestyle inflation.

Keeping up with the Joneses

A recent Federal Reserve report found that less than half of Americans earning between $75k and $100k saved ANY money, and 16% of those in that high income bracket were actually in debt. Seem crazy? Well blame what has been termed by psychologists as the hedonic treadmill – our instinctive desire to not only be more comfortable but to fit in with desirable social standards. Of course the core of it is our unconscious ego making us think that if we fit into a more elite social group it will alleviate anxiety (even though the opposite occurs as the treadmill never ends) – but we continue to spend as soon as we have the resources.What needs to be realized, though, is that when you start getting accustomed to a new more expensive lifestyle and your spending catches up to you, having to cut back again will be much more painful than just keeping it in check now.

I deserve it!

Of course more money generally means longer hours and more stress, which can give us the feeling that we deserve to buy nice thing for ourselves as a reward. While you should absolutely allow yourself to purchase something amazing to acknowledge your achievement, you need to be careful of long term upgrades like a more expensive car or bigger apartment. Too often people can use up their entire bump up in salary with these trade ups, not allowing themselves to save any of it. This is on top of all the new small indulgences you’re likely allowing yourself and not factoring into your budget now that you’re making the big bucks.

Of course some lifestyle changes may be necessary – you may need to upgrade your wardrobe, but this can still be done with a frugal mindset. I have tons of advice on how to get designer labels for less – remember, just because you can afford it doesn’t mean you should be reckless and pay full price. Maintaining a frugal mindset will allow you to enjoy all the good things without blowing a reasonable budget.

More money more problems?

So now you’re working your ass off and finally making more money and living in a bigger apartment that you can never enjoy because you’re always working and you can’t leave because you need to pay for this big apartment and now wtf do you do? You’re stuck at this job so that you can pay for all this crap. Sometimes making more money is just not worth it, and you need to consider Is Chasing More Money Costing You Happiness?  Keep yourself from feeling stuck at a job you hate by not getting yourself into financial trouble.

Experts generally recommend trying to put at least 50% of each pay raise toward financial goals—whether it’s retirement, emergency savings, paying off your credit card debt, or putting away more for a big savings goal like a vacation. You should already be automating your savings, so bump up the automatic transfer into your savings to reflect your pay increase and it’s not at risk of being spent.

I know what some of you are thinking – you can’t take your money with you when you die. Of course most importantly, you need to enjoy your life. Spend your money on experiences and don’t deny yourself things that will really make you happier. Just always remember that no job is guaranteed, and a layoff or emergency could put you out of work, so ensuring that you have money stashed away can alleviate a lot more stress than any expensive spa treatment.