It’s the beginning of a new year, and maybe you landed a promotion with a generous raise. But before you start browsing new house listings or book a dream vacation for your entire family, here’s an uncomfortable truth we see at Magone & Company every day: Most people who get big pay bumps end up no better off financially a year later.
And this has a lot to do with lifestyle inflation.
Lifestyle inflation is when spending habits rise right along with your income, preventing you from building the wealth you thought that raise would bring.
With discussions around the One Big Beautiful Bill impacting tax policy and take-home pay, responding strategically to changes in your income has never been more critical. What you do with that extra money determines your financial future.
Here’s what we recommend:
First, cover the essentials. Before considering any big upgrades, make sure your priorities are handled. For example, build a fully funded emergency cash reserve to cover three to six months of expenses.
Maximize your retirement contributions to take advantage of compound growth, and take steps to eliminate high-interest debt that’s costing you every month.
Lock in savings. Treat raises like they don’t exist! As your paychecks grow, redirect a portion of each one to a savings account, retirement contributions or debt payoff.
So even as you spend some of your new income, you’re still protecting your building and protecting your financial future.
Set percentage-based goals. Commit to saving a consistent percentage rather than a fixed dollar amount.
For example, if you saved 15% when earning $80,000, keep saving 15% when you earn $100,000. This ensures your wealth building scales with your income.
Maintain visibility. Track your spending using apps or spreadsheets. Small expenses like extra subscriptions that you don’t use, or frequent coffee runs can accumulate quickly. But monthly reviews can help identify these patterns.
Implement a waiting period. Wait on the extravagant purchases. You may want to impose a three-to-six-month cooling-off period or even holding off an entire year. If you still need or want the upgrade after that allotted time, plan and set a budget rather than making an impulse decision.
Calculate the real cost of upgrades. So you’ve waited, and now you want to pull the trigger on financing a new car. But first, take the monthly cost and multiply it out.
A $300 monthly car payment increase costs $3,600 annually. Over five years, that’s $18,000. Seeing the true cost may help you figure out if the upgrade is really worth it.
Focus on experiences over possessions. A weekend trip with family or going back to school to learn a new skill may bring you more joy than another tech gadget or wardrobe makeover.
Experiences create lasting memories, connections and personal growth while the excitement of new purchases can fade quickly.
Make it count
Financial success requires balance. As your income grows, you can improve your quality of life, but not at the expense of your financial foundation.
Your next raise is an opportunity to make smarter financial decisions. Don’t hesitate to reach out to the Magone & Company team with any questions about your long-term financial health strategy.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your business situation.