Your Assets Have Grown. But Are You In ‘Expense Denial’?

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Let’s say you’re working and pulling down a respectable salary, living within your means, conscious of how you spend your hard-earned dollars. And then you accept a new job with an increased salary. That’s great—but you might soon notice that your financial situation doesn’t seem to have changed much. When income goes up, most people don’t think about how their expenses will almost surely go up too.

In budgeting, we call this phenomenon “expense denial” or “lifestyle inflation.” Don’t fall into that trap. You may have more money in your pocket—but that’s only part of the story.

Subtle Changes

Your relationship with your new salary may only change in subtle ways at first. Perhaps you’re commuting farther, and your monthly costs increase. Maybe you need to get to work earlier, so you purchase lunch on a daily basis instead of packing it. You get a coffee on your way to work instead of making it at home. You got a nice raise, you can afford it. Convenience may trump frugality in little ways, driving expenses up unintentionally.

You spend more because you can, but at what cost?

Lifestyle Inflation Erodes Income Boost

Financial success may even tweak your mindset, leading you to spend more than you intended or realized. For example:

  • Your new job may be more time consuming, so you do less comparison shopping and more convenience shopping.
  • You feel that you’ve worked hard for this newly earned salary, you can go on a fancier vacation…twice a year.
  • You need some new clothes to match your new salary.
  • Your co-workers go to a more expensive gym next to the office and you want to be part of the group.
  • You make more purchases because you “deserve” them.

Planning Is the Key

There’s nothing wrong with spending more, if you have more to spend. But keep the outflows in mind and watch for the tendency to upgrade your lifestyle across the board. Awareness and planning are all it takes to keep lifestyle inflation from eroding income gains. At People’s United Bank, we can help you stay on track.

People’s United Advisors can help

Come see us about prudent investing.

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