When
one is a student or just starting off your career at the lower rungs of the
corporate ladder, one tends to restrict expenditure. Their financial realities
force them to be frugal and measured with their purchases, spending largely on
only necessities rather than luxuries. However, as people move up in their
careers, receive investment pay-offs or come into inheritances, their
disposable incomes increase. This increase in income often prompts them to
abandon frugality to engage in a high quality of life funded by higher
expenses.
One
may wonder why this would be a bad thing. After all, the entire purpose of
career progression is financial freedom. However, while we may like to believe
that all expenses are conscious ones that is often not the case. A sudden increase in fortune can blind people
to the actual extent of their necessary expenses. What were once ‘luxuries’ start to
increasingly become ‘necessities’? This
is further catalyzed through societal pressure and marketing that promotes
instant gratification, an enabling digital purchase environment, and social
media.
This
phenomenon is termed as Lifestyle inflation and essentially refers to the
tendency for a rise in income to be followed by a disproportionate increase in
discretionary expenditure above and beyond necessity. It can be a hindrance to
your long-term wealth creation.
Because
of how subtle it can be, lifestyle inflation can seriously compromise financial
planning if left unchecked. This is the
reason many people end up living pay-check to paycheck despite making enough
money to comfortably meet their needs. Giving in to lifestyle inflation also
has serious impacts on retirement savings and financial resilience in case of
emergencies. People are quick to lose track of long-term priorities for
short-terms experiences and can end up damaging their financial health. Thus,
it is necessary to not only account for any lifestyle inflation you may experience
but also actively work to factor the same into your financial planning to
mitigate its adverse effects.
This is a simple one, and doesn’t need too
much explanation. Knowledge is power. If you’re aware of the same, and see it
creeping up on you, you’ll be able to measure it and act against it. Too many
people are unable to admit that they are experiencing lifestyle inflation and
never make an attempt to fix it.
2. Make sure to budget
Budgeting is a crucial aspect of financial
planning. It helps demarcate needs and luxuries and allows you to effectively
plan all your expenses. It also helps to make sure you divert some of your
income towards savings and investments. In case there are specific luxury
expenses you want to make, such as buying new clothes, or maybe a video-game,
or taking a holiday. Make sure to budget them in advance so that you retain
control of your finances and avoid the trap of instant gratification.
3. Have strong reasons for expenses
Naturally, there are some large expenses
that need to be made such as moving to a new house, or getting a new car in
case the old one has become obsolete. However, even in such cases, always seek
to provide clear reasons for each expenditure. Developing this habit will help
you negate the impacts of lifestyle inflation as your expenses will always
remain conscious ones. You will be more likely to create strong budgets and
stick to them, regardless of an increase in your income.
4. Automate savings and investments
Automating your monthly contributions to
your savings account and your investments can help to maintain control over
your budget. Even if you see an increase in income and feel the temptation to
engage in celebratory expenses, you can channel the extra income towards your
retirement and emergency corpus.
Funneling your funds into a SIP Mutual Fund,
which automatically deducts the investment amount from your account every
month, can be a great way to start the same. Should you see an increase in
income, you can increase your contribution amount and avoid the temptation to
spend the extra income on frivolous purchases.
5. Resist the temptation to finance lifestyle through debt.
An increase in income may lead some to
erroneously believe that they can ‘afford’ to take on new debt. However, debt
should never be a first resort, particularly if being used to finance new
lifestyle expenses such as consumer durables or holidays. These loans often
have a high interest rate and result in long-and fairly large EMIs that act as
a regular drain on your finances, limiting your ability to save and invest.
6. Know who you are and what you need.
It’s easy to give into societal pressure and
make expenses that you don’t need to ‘climb’ the social ladder. However, it’s
important to know that material possessions offer only so much long-term
value. If one has to spend, one should
spend on experiences and knowledge as well as on activities that you can do
with your family and friends.
Conclusion
Aspirations are important, however, one should know which aspirations are good and which are bad. Lifestyle inflation occurs when one’s aspirations are built on flawed foundations and do not scale appropriately alongside one’s income and long-term financial requirements. It is alright to gradually increase one’s quality of life instead of making leaps and jumps with each increase in income. It is important to increase your contribution to your savings and investment funds proportionately with every increase in income.
If you’re seeking help to combat lifestyle inflation or are looking for guidance on growing and managing your personal wealth, Tata Capital Wealth Management Solutions has just what you need. Its team of expert and dedicated wealth managers will help you find the right investment strategy with a wide array of products, helping you grow your wealth and increase your quality of life in a sustainable manner.
16 October 2020
6 mins read
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