The U.S. economy shows a growing gap between savers and spenders, with wealthier Americans investing more in luxury goods and home improvements, fueled by a surge in AI stocks adding $5 trillion to household wealth this year.

For many like Renee, newfound wealth can lead to overspending, a phenomenon known as the wealth effect. Spending tends to rise when assets increase in value, which can lead to financial risks and poor decision-making.

As Renee considers spending on a dream vacation, experts caution against lifestyle creep, where spending increases with wealth. They advise reevaluating budgets, focusing on savings, setting financial goals, and spending responsibly to maintain long-term financial security and avoid debt.

Changes in wealth or income should prompt a fresh look at finances and goals to prevent slipping into debt. Lifestyle creep can create a “wealth mirage,” pushing savings goals further away. Stay grounded by reevaluating budgets, focusing on savings, setting financial goals, and spending within means.

Experts warn that the feeling of financial security tied to stocks or housing may not last. They advise regularly reassessing finances to prevent falling back into debt or negative net worth. Stay mindful of spending habits and prioritize long-term financial goals to maintain financial stability.

Read more at Yahoo Finance: Finally debt-free! But a quiet financial trap may be lurking when your net worth turns positive