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Earning more money doesn’t mean saving more money. Read on to learn more. [[{“value”:”
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For many years, my friend Hannah worked on a part-time basis while her kids were young. That was actually a sound personal finance decision. The amount of money she would’ve spent on child care would’ve almost wiped out her earnings. So she decided not to return to full-time work until her kids were old enough to not only attend school, but stay home alone after school as needed.
A few years ago, Hannah started working full-time again. And her higher paycheck gave her a prime opportunity to save money, since it was income beyond what her family was used to.
But instead of making an effort to save some of that extra money, Hannah got into the habit of spending it all. She also took out a huge personal loan to finance a $75,000 kitchen renovation she’s still paying off. And because of that, she’s now in a worse financial position than she was before her income doubled.
When lifestyle creep sets in
Hannah’s major downfall was that she fell into the trap of lifestyle creep — upgrading your lifestyle as your income rises rather than making an effort to live below your means. Once Hannah’s income doubled, she bought a new car that was much nicer (and way more expensive) than her former car. She also started paying for more luxuries, like frequent restaurant meals and a housekeeper.
To be fair, working more hours left Hannah with less time to cook and clean. So some of that spending may have been justifiable — to a point.
Where Hannah really went wrong, though, was going all in on a major kitchen remodel. Her old kitchen was perfectly fine, but she wanted a high-end kitchen with expensive appliances and more space. That required a construction crew to come in, take down a wall in her home, and build out a brand-new space.
In the end, Hannah spent about $75,000 to renovate her kitchen. And her higher income no doubt made it easier to qualify to borrow that money.
But now, Hannah has expensive loan payments to keep up with for her vehicle and renovation. And those payments are wiping out her added earnings and then some.
Be very careful when your income rises
It can be tempting to take on bigger expenses when your income jumps substantially. But a better bet is to take on a few additional expenses rather than commit your entire raise to ongoing bills.
Hannah’s situation isn’t so unique. But at this point, she’s stressed out about her debt and is worried about paying it off.
Thankfully, all of her debt is in installment loan form, so her monthly payments are fixed. As of the third quarter of 2023, U.S. credit card debt sat at $995 billion, according to TransUnion. Hannah is fortunate to not have any of that. But still, she shared her story with me so that others could learn from her mistake.
Recently, Hannah had to raid her savings account to cover a home repair. Had she been socking away a portion of her raise all this time rather than taking on more debt, she’d still have a nice cushion. Instead, she’s left with very little, which is compounding her stress.
So if your pay goes up, take on new expenses carefully. And no matter what you do, always aim to reserve a portion of your income for savings purposes, even if it’s just a small amount. Hannah wishes that instead of jumping into a kitchen remodel and financing it, she would’ve spent a few years saving up for it instead. She regrets her car a bit less, but either way, it’s debt she’s now stuck with. And you don’t want to end up in the same boat.
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