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Are You Letting New Wealth Overcome Your Good Financial Sense?

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 [3]. 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 [4].

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 [5] 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 [6])