Jan 12, 2026
With increasing reports of a “K-shaped” economy in the U.S., the divide between those who can save and invest and those who can’t is growing wider.
In fact, The Wall Street Journal reported that American investors are feeling good about their money and spending more on restaurants, business-class airline tickets and home improvement projects (1). JPMorgan Chase noted the growth of the top 30 AI stocks has added $5 trillion to household wealth nationwide this year.
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Meanwhile, Bank of America data shows spending for higher-income households rose 2.7% in October year over year (2).
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So what does this look like in real life? Meet Renee. She just turned 40 and has finally paid off her student loans. She owns a condo in a small city and has built solid equity. She has also been contributing modestly to her company’s 401(k) for several years. For most of the last decade, though, she felt perpetually underwater, living paycheck to paycheck.
Now, with the last of her loans gone and more room to save, Renee has crossed over into a new financial category: a positive net worth. She feels proud of how hard she worked to get here, but she’s also noticing a new feeling creeping in, the urge to splurge.
Here’s why the wealth effect can quietly derail your finances if you’re not careful and how to keep your spending in check when it feels like you’ve finally earned a break from strict budgeting.
The wealth effect
The wealth effect refers to the tendency to spend more when assets like stocks, retirement accounts and real estate rise in value, even if your cash flow and monthly budget stay the same. While it’s clearly fueling spending across the country, economists warn it can also lead to debt or risky financial decisions.
“When people feel wealthier on paper, or when their income increases, they often feel like they can do more,” Erica Cameron, a partner at wealth-management firm Cerity Partners, told the Wall Street Journal (3).
For Renee, that shows up as a new wardrobe and a long-held dream: a month-long vacation in France.
But even with her student debt behind her, can she really afford it?
A 2023 Visa study found that for every $1 increase in household wealth, consumer spending rose by 34 cents. That’s far higher than the pre-pandemic wealth effect of about 9 cents per dollar (4). Renee, it turns out, is far from alone.
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Lifestyle creep
For many people whose wealth is tied to stocks or the housing market, that feeling of being flush may not last.
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“All of this can go away pretty quickly, ” Cameron said. “We could have a 20% housing correction. We could have a 20% or more market correction.”
That’s why changes in wealth or income should trigger a fresh look at your finances and goals. Reassessing where you stand can help you figure out how much you can safely spend without slipping into debt or falling back into negative net worth.
Lifestyle creep, when spending rises right along with wealth or income, can feel natural. But some experts warn it can create a “wealth mirage” that quietly pushes your savings goals further out of reach.
How to enjoy your wealth responsibly
So how can Renee and others like her enjoy their positive net worth while keeping it intact? Here are a few ways to stay grounded:
- Reevaluate your budget: With debt payments gone, Renee can rebalance her spending across other categories and get a clear picture of how much money she has to work with.
- Focus on savings: Freeing up cash makes it easier to fully fund an emergency account and boost retirement contributions through automatic withdrawals.
- Set financial goals: As Renee enters a new phase, she can take stock of what matters most. Does she want to retire early? Buy a bigger home someday? Clarifying long-term goals helps guide smarter decisions now.
- Spend inside the lines: A new budget shows how much is available for fun purchases, including that dream vacation. It may take a bit more saving, but she can still enjoy short-term rewards without sacrificing long-term security.
Indulging once in a while is healthy and deserved. Just keep it in moderation. You’ll probably get more of a kick out of seeing your money in your bank account rather than seeing it hanging in your closet anyway.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Wall Street Journal (1, (3); Bank of America (2); XXX (4).
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Rebecca Holland is dedicated to creating clear, accessible advice for readers navigating the complexities of money management, investing and financial planning. Her work has been featured in respected publications including the Financial Post, The Globe & Mail, and the Edmonton Journal.
