Illustration by Erin Taj

Getting a Raise Ruined My Finances

How lifestyle inflation can sabotage your financial goals

It all started with one impulse buy: luggage. Like an alcoholic taking their first sip of booze in years, 25-year-old Kelsy fell off the financial wagon after over a year of strict budgeting.

“It’s the same thought process as when people on diets see a buffet: One time is not going to kill me,” Kelsy says of the luggage, which she bought for a trip to Alaska in July 2015. “And I will admit I have a problem with willpower and self-control.”

Buying new luggage gave way to buying souvenirs while on vacation, which led to buying rounds of drinks and going out to dinner after she returned home — “things I had really reined when I was trying to pay down my debt,” she says. “It felt good to not deny myself those things after having denied them for so long. It was taking a toll on my relationships, because like it or not, money is how we stay in touch with people.”

But it came at a significant cost: Less than four months after her trip, Kelsy realized she was $4,500 in debt — more debt than she’d had in the fall of 2013, when she first embarked on a budgeting and payment plan that had left her debt-free by January 2015. That was, not coincidentally, the same month she received her second promotion and raise in as many years. After 15 months of budgeting, she was finally feeling optimistic about her financial future, only to have all her progress undone by a few months of excessive spending.

“It was kind of eye-opening to see how easily you can get back to where you were,” Kelsy says of the experience.

Kelsy’s falling back into the red despite her raise is an-all-too common phenomenon known as “lifestyle inflation” — when you get a raise or an unexpected windfall, it’s easy to increase your spending accordingly, or even more. As a result, you may not be saving any more money than when you were earning less; in extreme cases, people like Kelsy end up saving even less. And if your lifestyle inflates with every increase in pay, significant financial goals — such as getting out debt or putting a down payment on a house — may be perpetually out of reach.

That speaks to Kelsy’s experience — when she started her debt elimination plan, it was with the goal of becoming financially secure enough to take out a mortgage. But re-accumulating the debt left her feeling like “a failure,” she says. “I accomplished this huge financial goal, and here I am, back again.”

Why does lifestyle inflation occur?

Kelsy, who requested that her full name not be used, repeatedly likened her lifestyle inflation to a person who goes off their diet. “They try to eat a doughnut, and end up eating the whole baker’s dozen,” she says.

For Kelsy, that meant going out for dinner and drinks instead of her typical cheaper alternatives, such as game or movie nights, or drinking beers in a friend’s back yard.

“It takes a toll on your self-esteem to not be able to keep up with your friends’ spending,” she says. “No one want to stay home drinking PBR when you can go out drinking $10 craft beer with your friends.

“It’s double-sided: You’re conscious the amount you’re gonna owe is going up, but you’re also like, Hey, it feels good to spend all this money.”

Dennis Hoffman, a professor of economics at Arizona State University, was slightly reluctant to discuss the psychology of lifestyle inflation because it’s an affront to how economists think. Economic theory assumes humans are rational beings, and spending more than you make is an inherently irrational decision in most cases.

“If I get a 10 percent raise, the rational, Personal Finance 101 decision would be to allocate several percentage points to debt reduction, several to increasing my standard of living and several to a one-time purchase,” he says.

But Hoffman described the lifestyle inflation phenomenon in terms similar to Kelsy’s: Spending sprees are a way to alleviate stress, especially after long periods of meticulous budgeting. “The psychology must be, I’ve been stressed, starved and I need some relief. I’m going to spend and not worry.”

Lifestyle inflation and the tendency to live beyond one’s means reflect generational shifts in how Americans think about credit and labor, he adds. Baby boomers were the biggest consumers in American history, and they normalized the act of racking up credit card debt.

“[Boomers] took on huge amounts of debt to finance their consumption and lifestyles in the ‘70s, ‘80s and ‘90s,” he says. “The younger generation has viewed their parents and grandparents as having good standards of living, and some of them want to be in that same situation, and it’s harder today. The irony, of course, is that baby boomers will blame the younger generation, saying, ‘They have to get their lives in order.’ ”

Post-recession, it has been more difficult for Americans of all education levels to land and maintain well-paying jobs. That difficulty breeds anxiety, Hoffman says, which people assuage by spending frivolously.

“The challenge is dealing with the stresses of today’s busy, active lifestyle in a labor market that is completely different from that of prior generations,” he says. “It is stressful, dynamic and requires people to keep learning [throughout their careers].”

How to avoid it

Much like with a healthy diet, Hoffman says, people should set realistic boundaries when trying to avoid lifestyle inflation, instead of trying to deny themselves all of life’s luxuries.

“When that raise comes along, you should take a rational portion and buy a new toy or trip. But there has to be some balance,” Hoffman says. “But if we have people who refuse to go on vacations and refuse to engage in these release-valve consumptions — dinner, trips — that’s a failure of balance, as well.”

Recent college graduates are especially susceptible to lifestyle inflation: Earning a steady paycheck after four-plus years of skimping can making grads feel wealthier than they are. Instead of designer clothes and expensive cars, new grads should invest in cheaper, more lasting status symbols such as fitness, hobbies and professional development classes, according to users on r/personalfinance, Reddit’s wildly popular subsection.

If you do succumb to lifestyle inflation, your first course of action should be to forgive yourself for your misstep, Hoffman adds.

Kelsy admits to feeling embarrassed about landing back in the red after all her efforts to get out of it. Her current credit card debt is $4,900, and she’s momentarily stopped contributing to savings because of the wedding she’s in next month.

“After [a spending spree], there’s a lot of regret and remorse,” Hoffman says of Kelsy’s experience. “But five years from now, when she gets the urge to binge again, she’ll have a lesson to look back on.”

John is a staff writer at MEL, where he writes the debt-reduction series “Into the Black.”

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