Raises Without Lifestyle Creep

A raise should make life easier. For many households it does not: a few years and several pay rises later, they feel no richer and save no more than before, because spending rose to meet the new income. This chapter answers when spending more is a good use of a raise, why the upgrade often fails to make people happier, what the drift costs in years of work, and how to decide where the next raise goes before it arrives.

Upgrades you chose, and upgrades that crept in

Spending more as you earn more is not a mistake in itself. Earning more is partly the point. A better chair for someone with back pain, a shorter commute, childcare that lets two people work, or a trip a person has wanted for years can all be good uses of a raise. The difference that matters is whether the upgrade was chosen.

Intentional upgrades are decided in advance, serve a value from chapter 1, and come with a known cost. They are counted in the plan.

Lifestyle creep is the rest: the slow rise in ordinary spending that follows income without anyone deciding it. Slightly nicer groceries, more delivery, a more expensive phone plan, a bigger apartment because you can now qualify for it. Each step is small and reasonable. Together they absorb the raise.

A simple test separates the two. Before a lasting increase in spending, ask three questions: does it serve one of my top values; would I choose it if I had to pay for it in one lump; and do I know what it does to my savings rate? An upgrade that passes all three is a choice. One that fails any of them is probably creep.

Why the upgrade rarely feels as good as expected

People adapt. Brickman and Campbell (1971) described what they called a hedonic treadmill: people tend to return to a fairly stable level of happiness after good and bad changes alike. A later study by Brickman, Coates and Janoff-Bulman (1978) found that lottery winners were not much happier than other people some time after their win, and took less pleasure in ordinary events. A bigger home or a better car becomes the new normal within months, while its cost continues every month.

People compare. Spending is partly social. Kuhn and colleagues (2011) studied a Dutch lottery in which whole postcodes won together and found that the neighbors of winners were more likely to buy new cars themselves. Agarwal, Mikhed and Scholnick (2020) found that in Canada, larger lottery wins were followed by more bankruptcies among the winners' close neighbors, consistent with people spending to keep up. Social media puts a curated version of many other people's spending in front of everyone, all the time.

Fixed costs lock it in. Many upgrades are not one-off purchases but commitments: a lease, a car loan, a larger mortgage, memberships. Once taken on, they are hard to reverse, so creep tends to go only one way.

None of this means people should not enjoy rising income. It means the upgrades that last tend to be the chosen ones, and the defaults tend to fade.

What creep costs: a worked example

Spending does damage twice. Each extra dollar spent is a dollar not saved, and a higher level of spending also raises the portfolio needed to support that spending later. The examples below use the engine behind our FIRE calculator, with a 4% withdrawal rate, a 7% return before inflation and 3% inflation.

Take a household with $60,000 invested that spends $50,000 a year and saves $1,500 a month.

On this plan it reaches a portfolio of $1,250,000, enough to support its spending at a 4% withdrawal rate, in about 30.9 years. Now a raise arrives that lifts take-home pay by roughly a sixth. The household can spend it, save it, or split it, and the three choices lead to very different places.

If the whole raise goes to spending, the household is not standing still. Its target rises to $1,550,000 while its saving stays the same, and the wait grows from about 30.9 to about 35.1 years. Splitting the raise in half raises the target to $1,400,000 but still shortens the wait to about 28.4 years, with a noticeably better life along the way. Saving all of it keeps the target at $1,250,000 and brings it within about 23.1 years.

The gap between the first and last cases is more than a decade of work, from one raise. The middle case is often the most realistic: it lets the household enjoy part of every raise while still moving the date closer. The lifestyle creep calculator runs this over a whole career, with a raise every year and any share of each raise spent.

These are steady-return illustrations; real returns vary from year to year, and nobody can promise a date. The comparison between the cases is the point, not the exact years.

A plan for the next raise

The cheapest moment to stop creep is before the raise lands, while the money still feels hypothetical.

Decide the split in advance. Choose now what share of any future raise goes to saving and what share to living. Half and half is a common choice; people with a long way to go may save more. Write it down.

Automate the saving share. Thaler and Benartzi (2004) found that employees who agreed in advance to raise their retirement contribution at each pay rise saved far more over the following years, because the increase came out of money they had not yet started spending. Many workplace plans offer an automatic yearly increase. If yours does not, change the contribution the week the raise appears on your pay stub.

Name the upgrade you want. Give the spending share a purpose that serves a value, such as more travel, a better commute or help at home, rather than letting it disappear into everyday costs.

Be slow with commitments. Treat anything with a monthly payment or a contract (a bigger lease, a car loan, a club) as a decision that needs a waiting period, because it is hard to reverse.

Check the after-tax figure. A raise is smaller in your account than on the offer letter, because tax and payroll deductions come first. The raise calculator shows how much of a raise you keep and what it adds over a career.

Manage the comparisons. Muting accounts that make you feel behind is a legitimate financial decision. So is deciding, with a partner, what "enough" looks like for your household before the next comparison arrives.