The Psychology of Money
Why Every Pay Rise Feels Like It Happened to Someone Else
The strange cruelty of lifestyle inflation is that it doesn't feel like spending more — it feels like finally living normally.
The Idea
There's a concept in economics called the hedonic treadmill: the observed tendency for humans to return to a baseline level of satisfaction relatively quickly after any positive change in circumstances. Win a prize, get promoted, move to a nicer neighbourhood — within months, the new normal is just normal. But lifestyle inflation is the hedonic treadmill with a financial sting attached. It's not just that the feeling fades; it's that the spending doesn't. The upgraded rent, the newer car, the restaurant habit that started as a treat — these quietly become fixed costs, making you just as financially stretched at a higher income as you were before. What makes this particularly insidious is that it rarely feels like a choice. It feels like calibration. You earn more, so you buy things appropriate to someone who earns more. The social logic is almost invisible: we unconsciously benchmark ourselves against the people around us, and as income rises, so often does the peer group. Thorstein Veblen called the conspicuous version of this 'status consumption' back in 1899, but the subtler version — what you might call ambient status spending — is harder to see because it doesn't require ostentation. It's the slightly better holiday, the higher-end grocery shop, the assumption that certain things are beneath you now. The result is that wealth accumulation and income growth can become almost entirely decoupled.
In the World
In the early 2000s, research by economists Dirk Krueger and Fabrizio Perri found something that initially seemed paradoxical: despite growing income inequality in the United States, consumption inequality — the gap in what people actually spent — had barely widened. The conclusion they drew was striking: people lower on the income scale were borrowing to maintain consumption standards closer to those above them. But look at the same dynamic from the top, and you see a mirror image. As incomes rose among higher earners, spending rose with them — almost automatically. A now-famous study by Thomas Stanley and William Danko, published in their book 'The Millionaire Next Door', found that the people most likely to have built real wealth were not the highest earners in their professions, but those who consistently spent well below their income ceiling — often living in modest houses in unfashionable neighbourhoods, driving ordinary cars, and being quietly indifferent to the signals their spending sent. The counterintuitive figure that stayed with readers: many of the people who looked wealthy, driving luxury cars and living in expensive postcodes, had very little actual net worth. Meanwhile, the unassuming ones — the ones you'd never guess — had quietly accumulated for decades. The pattern wasn't income. It was the gap between income and expenditure, held steady even as one of those numbers grew.
Why It Matters
Understanding lifestyle inflation isn't about living like an ascetic or refusing to enjoy more when you earn more. It's about making the invisible visible. Most people don't decide to inflate their lifestyle — it just happens, through small upgrades that each feel entirely reasonable in isolation. The power of noticing this pattern is that it gives you back the decision. You can choose to spend more on the things that genuinely improve your life, while staying deliberately indifferent to the ambient pressure to upgrade everything at once. The practical implication is almost comically simple: when income rises, try to let some meaningful fraction of that rise disappear into savings or investments before your expectations adjust to include it. The window is short — hedonic adaptation works fast, and once the new baseline sets in, cutting back feels like deprivation even if you were perfectly content before. What this lesson really offers is a reframe: the feeling that you 'deserve' to spend more as you earn more isn't wrong, exactly — but it's worth asking whether the things you're spending it on are actually making your life better, or just keeping pace with a moving target.
A Question to Ponder
If your income had stayed the same for the past five years, which of your current expenses would you genuinely miss — and which ones would you barely notice losing?
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