The Money Illusion
Your salary went up 5%. Prices went up 7%. You got poorer and felt good about it.
Grounded in the research on money illusion
Track real purchasing power
Stop measuring your financial progress in dollars. Measure it in what those dollars actually buy. Irving Fisher named this cognitive trap in 1928: people fixate on the nominal number — the figure on the paycheck — and ignore inflation eating the real value underneath. A $60k salary in 2015 and a $75k salary in 2024 buy roughly the same basket of goods. The raise felt good. The math didn't move.
Adjust every number for inflation
Before you celebrate a wage increase, salary offer, or investment return, run it through the CPI. If inflation is 4% and your raise is 3%, you took a real pay cut while your employer told you good news. Shafir, Diamond, and Tversky confirmed this in their 1997 study: people systematically prefer nominal gains over real gains, even when the real outcome is worse. The brain responds to the number, not the purchasing power behind it.