You've Been Warned: A Financial Planner Says This Is The Worst Money Move You Can Make After Getting A Raise

Imagine this scenario: you work hard for years and negotiate a good salary raise between 3% and 5% of your current income. But months after the raise is finalized and you start receiving larger paychecks, you also begin taking on more debt or making various unnecessary purchases. Slowly, you fall into a worse financial situation. This is known as lifestyle inflation, and it can cost individuals greatly if left unchecked. In fact, according to personal finance expert Andrew Lokenauth, lifestyle inflation is the worst move someone can make after securing a raise. "Your spending shouldn't increase just because your income does," Lokenauth told GoBankingRates.

With a raise, you might assume that the increase in income can afford you new luxuries, but that is the exact psychological trap lifestyle inflation can create. It can convince individuals that their increased spending will be balanced out by their new income. And while it might work for a while, after consecutive months of overspending, this behavior can have major downstream effects. For example, you may not be able to save for emergencies or stall large financial goals, such as buying a home. Or you may find it harder to even afford basic necessities. With this in mind, it's best to avoid lifestyle inflation altogether.

Lifestyle inflation can very easily creep up on individuals, especially if they don't keep track of their finances and spending. But with a raise, lifestyle creep can easily become the new normal for an individual as they may use the increased income to justify the increased spending. And soon enough they can be stuck in cycle wanting more material goods. This effect is commonly known as the hedonic treadmill effect. To avoid falling into the trap, individuals should be conscious of lifestyle inflation and have clear financial goals such as boosting their savings or investing while also allowing room for responsible splurging. After all, having defined savings goals is just one of the signs you're doing better than the average person — even if it doesn't feel like it.

According to Lokenauth, individuals who have received a raise should "put that extra money into savings or investments," instead of making extravagant purchases. The strategy of increasing contributions to savings and investing is effective in avoiding lifestyle creep by tapping into psychology. By directing funds from your raise to separate savings or investing accounts, you can avoid seeing the additional income hit your main checking account. When the money is out of sight and out of mind, it's often less tempting to increase your spending. 

Finally, while remaining rigid with your financial goals is essential, it is also important to reward yourself for the hard work that earned you the raise. It could be a good idea to plan to purchase a specific item with the new raise or even set aside a certain amount of money to indulge yourself. By being intentional with your rewards, you may be less likely to justify repeated splurges that can slowly eat away at the sudden wealth from your raise over time.