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.
Additional Read: The SMART approach to your first financial plan
Easy ways to account for lifestyle inflation:
1. Be aware
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.
Additional Read: Why are SIPs an Ideal Choice for the First-time Investor?
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.
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.