Get a Raise Last Year? Choose Savings Inflation and Not Lifestyle Inflation

By Jessica Sommerfield

| Photographs By maroke

Getting an annual raise or a promotion that comes with a higher salary is a great feeling. It makes you feel appreciated for what you do, and, if your finances were tight, it brings a sigh of relief.

What’s the first thing people tend to think of immediately after a raise? What to do with the extra income, of course, and usually, where to spend that sum. It’s not the immediate reward that’s the biggest problem, though. Going out to a nice restaurant, taking the weekend away, or even purchasing an item you’ve had your eyes on for a while (assuming it isn’t a Lamborghini) is nothing to feel guilty about.

It’s when a little extra monthly income turns into an excuse for lifestyle creep (also called lifestyle inflation) that you really need to watch out.

If you were especially hurting before the raise, your mind might turn to what most people would consider needs. But, for most of us, the idea of extra money immediately leads us to think about the things we want. Depending on how long your wish list is and thanks to credit cards, that first take-home pay after a raise may vanish even before the money hits your bank account.

The situation could be even worse if the wish list includes ongoing budget categories and expenses now that they seem more “affordable”: premium-level media packages, subscriptions, memberships, payments for a newer car, the mortgage for a larger house, etc. That’s because not only did you quickly spend the raise of that first paycheck, but you also committed the extra income forever to an ongoing expense.

No wonder financial analysts say that most of us will never become millionaires.

So what can we do? What if, instead of letting a raise lead to lifestyle inflation, we chose savings inflation?

Look at the habits of truly wealthy people (not just people with fancy stuff bought with debt). Whenever these people experience a windfall, they don’t spend all of it—they sock it away in emergency funds, savings, and investments instead. And they don’t do this because they can’t find anything they like to buy right now. They just consider the things they’ll want in the future—financial security, residual income past retirement, funding their children’s education—more important. It’s forward thinking.

Now for a personal example: my husband got a promotion that came with a significant raise. Immediately, it was tempting to think about which discretionary categories we wanted to expand. Ultimately, we decided to leave these categories the same and let our savings inflate instead. After all, we have some debt we’ve been working to pay off and some large home-related expenses to save up for (among other things).

Our practice is far from perfect, and the temptation to inflate our spending “just because we can” will always be there. I’m glad we chose savings inflation instead of lifestyle inflation, though, because that means we are that much closer to financial independence.

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Tags - Career, Saving


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