You know you have arrived when you get a fat increase in your salary and look for different ways to spend it. After all you feel “I deserve it after all the hard work”. How about buying that 40k smartwatch or the 50″ TV or the 5 star vacation you had planned.
Welcome to lifestyle inflation.
Lifestyle inflation means an increase in one’s spending as a result of increase in one’s income.
As quality of life improves with higher income your expenses could increase in various ways like :
- Dining out/Food take out more frequently and at pricier restaurants
- More frequent upgrades to the latest smartphone / newer model cars
- Taking out personal loans for short term expenditures like luxury vacations
- Buying a larger apartment/house because “you can afford an higher EMI”
- Impulsive Purchases of Branded clothes/footwear/accessories
- Buying gadgets which you promise yourself you would use “every day/week/fortnight” but which end up lying around in your house rarely being used
- Keeping up with the Joneses
How does lifestyle inflation impact your financial goals ?
In a way lifestyle inflation happens as you progress in life from being a student to an employee , get promoted, earn bonuses, work abroad, get a higher paying job etc. The higher the income that you earn, more are the opportunities to buy/spend/experience that you get. However the flip side is that the new spending levels become the new normal, leaving us playing a catch up game. One fine day you might realize you don’t like your job but “I can’t leave this job because despite the higher level of income, my savings aren’t enough”.
As compared to Consumer price index (CPI) which tracks inflation at the retail level for a fixed basket of goods and services and has an impact of 4-5% , lifestyle inflation can have an additional impact of around 4-6% on our average monthly expenses every year. Consequently , if you don’t take lifestyle inflation into account, you will end up saving less for major financial goals.
How do I minimize lifestyle inflation ?
- Save at least 1/3rd of your income
Keep aside 1/3rd of your income , before spending, towards investing for financial goals. Ensure that you have basics of personal finance covered like having an emergency fund, term insurance and health insurance .
- Debt planning
Use bonuses/increments to partly repay your home loan or car loan . You can also use them for investments for long-term goals.
- Say no to high interest personal loans/ Credit card debt
Avoid taking personal loans where you end up paying 12-15% interest. Same goes for rolling credit card debt which can set you back with interest charges of 40% or more.
- Live your life rather than your neighbour’s / colleague’s /friend’s
Remember that your goals and your budget are your own. Similarly the goals you’ve prioritized have a better chance of being achieved provided you stick to your financial plan. Societal pressures with regard to spending won’t help you make the best of your money.