How can rising income levels lead to lifestyle inflation?
It’s easy to see a higher salary as a ticket to financial freedom. In theory, earning more money means you could pay off debt faster and save more for retirement. In reality, making more often means spending more.
This phenomenon, known as lifestyle inflation, is what drives many people to get that phone upgrade, new car, pricier wardrobe, or nicer apartment the moment their income increases — and reset how, and how much, they spend as they move ahead.
This experience — the way each uptick in income is followed by a desire to spend that income on flashier, fancier, and more expensive purchases — may be familiar to anyone who has ever received a raise.
What’s less clear is how workplace expectations and professional achievement — not just growing salaries — are closely aligned with increased spending. Lifestyle inflation can creep in at every income level, and it’s a force to be reckoned with.
Why lifestyle inflation happens
When lifestyle inflation edges into the workplace, it’s often in subtle and seemingly harmless ways. First, joining co-workers on a coffee break might mean switching from a $1 cup of Joe to a $5 latte. Then comes a promotion, and with your career taking off, upgrading your wardrobe seems like a no-brainer. You’re swamped at the office, and buying lunch instead of making it the night before becomes the norm. Suddenly, that perfectly adequate car you’ve had for years pales in comparison to colleagues’ newer, pricier models, and all those extra earnings you planned to put toward savings are quickly gone.
While it’s easy to write off these increases as superficial or status-conscious indulgences, it’s more complex than that. Material markers of career success can be shorthand for communicating ideas about who we are and what we’re capable of, particularly among younger professionals.
“They’ve worked hard — they're looking for the brass ring,” says Dennis Hoffman, an economics professor at Arizona State University’s W. P. Carey School of Business. “They're looking for a sense of accomplishment. They're looking to demonstrate to their peers — maybe at other jobs or who have chosen slightly different routes — that the route they've chosen is a rewarding one. And [those] rewards manifest themselves in attire or automobiles, where you live or what kind of trips you can take.”
And it’s not just lifestyle that changes as income increases; rising salaries could also influence how people think about debt. According to a Marcus by Goldman Sachs®-commissioned survey, people with household incomes under $100K say they consider about $7,200 owed to a bank as “debt.” For people with household incomes over $100K, the threshold is much higher, at approximately $24,500.
The costs of climbing the ladder
Advancing professionally often comes with dinners out with colleagues, happy hours after work, and other after-hours social commitments — all of which can cost you.
The stress is amplified for America’s 55 million independent workers — a whopping 35 percent of the workforce, according to a study commissioned by the Freelancers Union and Upwork — for whom networking over drinks or dinner is practically a job requirement.
“These connections give you the ability to be mobile, to move up the ladder, to transition from one employment opportunity to another, or even to garner new opportunities as a freelancer or consultant,” Hoffman says. “Fitting in with the status of the group is not just about lifestyle,” he adds. “You're earning points toward prosperity and career stability, just like in the old days when people who worked one job their whole career moved up the ladder by positioning themselves with the boss.”
Like independent workers, professionals working in competitive corporate jobs or at up-and-coming startups face their own set of lifestyle inflation-related challenges. Particularly in work environments full of talented high-achievers, getting a foothold on that next rung can mean putting in long hours and staying calm under intense pressure.
It’s only natural to want to reward yourself with small pleasures that bring instant gratification — especially when the payoffs of saving for retirement and hustling day in and day out seem far off.
For people who work 12-hour days and on weekends, these “rewards” often tend to make life easier or more expedient. For instance, online shopping can be a way to let off workplace steam, and heading to a restaurant can give you something to look forward to after a long day at work.
Of course, there’s nothing wrong with rewarding yourself for hard work. The problem arises when being ambitious and competitive becomes an excuse to overspend.
How to avoid lifestyle inflation
Creating financial boundaries can be difficult as income increases, and the lack of transparency in how we spend our money day to day adds to the challenge. For example, online bill paying makes life easier, but it also means we might not pay close attention to how expenses shift from month to month, or where our money is actually going.
Simply becoming more aware of financial transactions that disappear into the ether by actually looking at credit card statements can help curb unnecessary spending.
Keeping a sharp eye on monthly expenses also prepares you for the day when your earnings might plateau, or even drop. One way to stay on track is to “pay yourself first” each time you get a raise. In other words, devote a portion of the raise directly to savings before you have a chance to spend it.
That way, unconscious spending is less likely to cause a problem. And over time, having more control over where your money goes becomes its own reward.
Ultimately, Hoffman says it’s possible to enjoy the increased salary you’ve worked so hard for and still stay in control of your finances. The key, he says, is balance — taking into account short-term desires and long-term needs.
The Marcus by Goldman Sachs® Debt Survey was conducted between November 9 and November 16, 2016, among 1,000 nationally representative Americans ages 22 and over, using an e-mail invitation and an online survey.
This article is for your informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.