Personal Finance 

Are You Letting New Wealth Overcome Your Good Financial Sense?

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Stack O'Money!One of the issues with new wealth is that it can provide you with a feeling of giddiness. If you’ve just graduated from school, it can be a heady feeling to know that you have a lot more money coming in.

Sometimes, the difference seems so big that you lose perspective and begin spending money at will. When you’re so rich now, it seems as though you’ll have plenty of money to do what you want.

Unfortunately, this wealth effect can lead to poor financial behaviors — and even to debt.

Misjudging What You Really Have

While my husband and I were both at Syracuse working on our graduate degrees, we lived close to the bone. We scrimped and scrimped (there was no saving happening at this time).

After I finished with my Master’s degree, we moved for my husband to work on his Ph.D. I began freelancing. It was still difficult, since we had credit card debt and bills, and my husband’s student loans and small graduate assistant stipend weren’t quite cutting it. Plus, I had to start repaying my student loans.

However, I began making more and more money. The credit card debt was disappearing, and the student loans were made with ease. Then one day I realized that I was on track to make more than $40,000 that year. That level triggered something in my mind. I told my husband. We rejoiced.

And went on a spending spree.

We had this idea that we were richer than we really were. When you’re scraping by on less than $20,000 a year, and suddenly see that you will be bringing home double, it seems like you have unlimited wealth.

Instead of pinching pennies, we began buying whatever we could. And putting it on the credit cards. No worries! We have plenty to pay it back. Sadly, we had no idea how much we were spending. We were just buying. The increase in income had the effect of encouraging us to think that we couldn’t spend all that money.

Getting It Under Control

After a few months, we realized that this wasn’t working. We were feeling flush, much as many consumers do on pay day. So we spent without paying attention to where the money was going.

We realized that something needed to change. Even though we were making more money, all of the progress we had achieved with paying down our credit card debt had been erased. Our lifestyle inflation was out of control because we felt wealthy.

While there’s nothing wrong with feeling confident about your financial situation, you do need to be careful not to let an increase in income go to your head. Just because you have a higher income doesn’t automatically mean that you have enough money. And it certainly doesn’t mean that your troubles are over.

In many cases, it comes to down to money management. Make it a point direct your resources. Consider what your want your money to accomplish, and make it a priority to first increase your savings and retirement contributions. And track your spending. That was one of the main mistakes my husband and I made. We weren’t paying attention to where the money was going, or how much we were spending.

If you want to retain control over your finances, you need to pay attention, and practice good money management strategies. And when you do experience an increase in income, give your money jobs to do. That way it won’t be burning a hole in your pocket.

Have you ever had this happen to you? How did you overcome the problem?

(Photo: doctorwonder)

{ 11 comments, please add your thoughts now! }

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11 Responses to “Are You Letting New Wealth Overcome Your Good Financial Sense?”

  1. It’s never happened to me, but I’ve seen it happen to others. We had a friend in college who inherited $36k and blew through it in one year.

  2. I’ve always been a frugal person so when I started making more money, my finances never got out of control. However, its common to have some lifestyle inflation…and probably okay as long as you’re still living below your means and saving. The best way to combat out of control lifestyle inflation is to increase your 401K contribution or other automatic savings vehicle whenever you get a raise so you don’t see it. If I don’t see it, I won’t be tempted to spend it.

  3. admiral58 says:

    It’s very hard when you inherit and aren’t ready. Clients need to use trusts.

  4. Shirley says:

    This happened to me when we received an unexpected windfall in the form of a small inheiritance. Feeling like this was ‘extra money’ I spent part of it on unneeded items and when I started entering that expenditure on my ongoing spreadsheet, it pulled me back to reality. The rest went to savings and I am ever so thankful for that spreadsheet!

  5. Karl says:

    More nonsense about lack of self control. I’ve never been this way so I don’t understand it at all.

    Seems simple: if I make x then I should spend less than x as it is a certainty that an emergency will come along where I need money. Also, whatever I am spending my money on over and above my income I must do without (by definition)

    • Steph says:

      With the state of our country’s spending, both individual and federal, this topic is NOT nonsense. If everyone had your financial self control, then this article would be unnecessary, but since we all can’t be perfect, I suggest using encouragement rather than turning your nose up at the rest of us.

  6. DG says:

    If you both went thru hardship , learned to pay all debts and well educated with masters and PH.D and if you start creating lots credit card debt after and go on spending spree then two things needed to be done. First return those masters and PH.D back to college where you got it and second find some money to see a Psycho doctor. Fair to say you both are worst then college drop out like many T V personalities who earn money for their looks.

    • Steph says:

      Considering the fact that they eventually realized what they were doing and changed their behavior for the better, revoking their degrees and calling them names is a little too much.

  7. Bucksprout says:

    I understand why your husband and yourself let your new found wealth overcome your financial sense. Almost anybody would celebrate their new found wealth with a purchase or a couple. I think in your case you got ahead of yourself. Your husband and yourself began to overspend when you realized you were on track to make $40,000. Next time you should celebrate when income actually starts coming in and buy something that will help you make more money.

  8. To help reduce the temptation of spending any extra income I only deposit X amount of money into our checking account each month. Everything else goes into savings and when possible I increase investment contributions. At least it was only a few months before you recognized what you were doing and fixed it accordingly.

    • Sally says:

      Jennifer @ Money Aches – You definitely got it right!

      Limiting money in one’s checking account is money that is not subject to be spent.

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