Lifestyle Inflation - A silent killer of wealth

 Lifestyle Inflation - A silent killer of wealth

 

Inflation is a common enemy of all in general and investors in particular. It slowly erodes your money's purchasing power. While inflation may be unnoticeable in day to day life, its influence gains considerable significance with time.

Lifestyle might simply mean, for some people, being able to live the life they want. This is a subjective thing and it means different things for different people. With rising income, we more often tend to upgrade our expenses. For example, if your income goes up by 1X times, you might spend 2X as much money on lifestyle based on your perceived improved lifestyle or social status. Thus, with time we end up in lifestyle inflation without even realising it has happened!

In this situation, when it comes to savings, you would hear people say that "I seem to earn more, but I still cannot seem to save money". Well, this is how lifestyle inflation operates!  It makes you spend more and more money to achieve a perceived higher standard of living. It can occur anywhere, from everyday expenses (like a cup of coffee) to big purchases (like buying a car). As a result, there is more money, but the problem is still the same (no proportionate savings or investments) . And that is how lifestyle inflation becomes a silent killer of your wealth.

Human desire is endless (this may seem like a philosophical statement but is actually very material and practical ) . When we reach one goal, we aim for another. It is nearly impossible to stop wanting more.

Suppose a hard-working employee at an MNC, Mr.Ashok, purchases a used small car for his commute when he starts his first job. After a few years, he gets promoted and upgrades to a new car. After a few years, that car is replaced by a new SUV. After a while, premium vehicles emerge, then better luxury vehicles emerge, and so on.

The same scenario can happen in every aspect of your life. These small upgrades may seem insignificant, but they can add up to huge expenses that can set you back financially.

A lifestyle inflation is like a hole in a tyre. You can pump air in, but you won't be able to fill the tyre until you fill the hole. Now you might be thinking, How can I fight this inflation?

The truth is, compromising on lifestyle and accepting something less than what you desire is challenging. However, if you want to maintain financial security and sustainability, you need to look beyond and take the necessary steps. It affects your self-worth, dignity, and any potential social perceptions. In this article, we will look at some strategies for avoiding/overcoming lifestyle inflation.

Don't Follow The Status Quo!

We live in an era of expectations. Many people feel the need to keep up with their neighbours and friends (The Joshis and the Joneses) . Buying an iPhone, a brand-new car or other luxuries, is not a necessity, but too many people make it one. The excitement of buying the latest gadgets can quickly fade, yet many people still spend beyond their earnings to buy these luxuries. They end up with expensive items and debt - not a good financial plan for anyone! It's important to stay goal-orientated and think about your future as well as your present. Planning your financial goals in advance can help you better determine what you need and what necessities are worth the investment. The key is staying disciplined by putting your long-term goals as a priority and regularly investing for them, so that you can have a life of financial stability that's free from debt and worry.

Consider The Priceless Value Of Your Purchase

Most people say that you can't put a price tag on relationships. That's why it's always a good idea to consider the non-monetary benefits of your purchases. For example, buying a BMW may give you some happiness, but it won't for much longer. This is a perfect example of the College time learning of the Law of Diminishing Marginal Utility . On the other hand, spending money on a family vacation for 7 days is guaranteed to provide you with long-lasting emotional benefits. Though it may be different for everyone, this philosophy will help you avoid overspending and make smarter decisions in the future.

Sort Out Your Financial Priority

Understand and identify if your goals are on track, by making a list of your needs and wants. Prioritize needs over wants to help balance your budget. Don’t increase your spending and compromise your long-term financial goals by building a gap in them. Save up for what you want before getting it! Learn and implement the difference between Good EMI and Bad EMI and Good Debts and Bad Debts. Prioritizing financial goals is the best way to ensure that you will be financially stable in the future.

If you set the financial priorities you are determined to meet, it helps to resist temptation. When you set and see regularly your top objectives, like providing for a sustainable lifestyle in your later years and a high-quality education for your children, you will consider buying a lightly used car and starting to build an education or retirement fund.

Having said this, you should also not discourage all your expenses. Just think carefully before spending and spend wisely. Be aware of your financial strength and your present lifestyle and keep investing via secured and trusted investment platforms.