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

by Jessica Sommerfield · 10 comments

salary inflation
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 need to really guard against.

lifestyle inflationIf 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 worst 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 pay raise of that first paycheck, but you committed the extra income forever to an ongoing expense.

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

So what can do we? 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.

How do you approach an increase in income? Have you ever chosen savings inflation instead of lifestyle inflation?

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  • Alexander Davie says:

    I do a hybrid whenever I get a raise or a bonus. I first always put a bulk of the new money into savings or investments. But I also treat myself to a present so I can enjoy the fruits of my labor. And in some cases instead of the onetime expense to enjoy I’ll increase my monthly expenses. For example, recently, I added a gym membership.

  • Soda PDF says:

    I ran a plant with hundreds of employees, all of whom made less than I did but I was always amazed that they had bigger houses, nicer trucks and cars, and much nicer outdoor toys than I did. But then I did retire early and they are all still out there working!

  • freebird says:

    This pretty much sums up how I reached financial independence. My standard of living has hardly changed since I went to grad school three decades ago. My first few years of work it seemed hard to save much, but I did it knowing it would be worth it in the long run. It snowballs like debt, although in a good way, next thing you know your invested savings are pulling in more income than your job. If you think of retirement as parole, then saving more gets you time off for good behavior.

    • Myfinancekits says:

      Hi Freebird, you have said it all. I remembered working as a finance manager. My subordinate bought his car say like 2 years before I did. What I was doing with my money then was to invest until my investment grew to the level I could comfortably buy a car without taking any loan.

      • David @ says:

        You can either buy something or you can resist, save that amount and one day manage to have the investment proceeds pay for a new one again and again for the rest of your life. You are doing it right by picking the latter!

    • David @ says:

      I like that analogy freeboard. Let’s all get out of parole early!

  • steveark says:

    I ran a plant with hundreds of employees, all of whom made less than I did but I was always amazed that they had bigger houses, nicer trucks and cars, and much nicer outdoor toys than I did. But then I did retire early and they are all still out there working!

    • David @ says:

      Great job Steve!

      And I bet all your employees looked at you when you retired and wondered how you managed to quit the rat race so early!

  • Myfinancekits says:

    If you have a raise in your income, you need to watch out not to fall victim of Parkinson’s Law, Parkinson’s Law says that expenses always rise to meet income. Parkinson’s Law has been adjudged as one of the best-known and most important laws of money and wealth accumulation. If anyone wants to increase wealth, he should try to save/invest more rather than spending more. Do you find it difficult to save? The truth is that you can save money even though you don’t have much. Find out!

    • David @ says:

      It’s so common to let expenses creep up whenever you get a raise. That’s why automated savings are so great. You take it out of your sight before you get a chance to use it, and then you end up with a big pile of money after a while.

      It’s hard to explain to my friends in sound bites, but saving money and investing the sum long term works!

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