If you have joined the corporate lately, you might remember living off all the amount credited to your account. You might have faced difficulties in paying off your debt, saving for a particular goal, or meeting any big-picture financial targets. This situation is referred to as lifestyle inflation.
Understanding Lifestyle Inflation
To put it into words, lifestyle inflation is when an individual's spending increases more than their income. Some high-level events which lead to such events are graduation from college, a promotion at the office, a significant salary raise, annual bonus etc. As salary increases, many people start placing a higher value on acquiring objects to achieve happiness. These objects can be a new car or an upgrade, a new house, a new laptop setup, moving to a better apartment, etc.
One of the most notable instances of lifestyle inflation is the transition from college to a full-time job. Despite having lived on a small budget, the change facing students makes them confident in making luxuries a necessity, which results in increased spending. One of the reasons is the lack of oversight or simple financial independence. The increase in expenditure from sharing a room to having a private room makes sense for an individual, but only so much for a financial decision.
Soon after graduation, Anubhav started working with a bank as a relationship manager. Soon after, he moved from his shared apartment to a 1BHK. His spending on rent increased three times. He also started exploring elite cafes with one of his colleagues, which was generally a sandwich bar during graduation.
In a few months, Anubhav realized his monthly spending at over three times from graduation.
Significant increases were as follows:
Rent increased three times
He did not share cooking, cleaning, and billed expenses with anyone
Spending in cafes was a new expenditure
After one year on the job, Anubhav did not have health or life insurance, savings, or investments. This was accentuated when he decided to buy a two-wheeler for a comfortable commute to the office. When he received his annual raise, he took a loan for a motorcycle and paid the full monthly appraisal in loan EMIs.
Strategies to manage lifestyle inflation
Lifestyle inflation is severe and ignored cause for why many people live paycheck to paycheck, default on EMIs, pay the minimum amount on their credit cards, do not save or invest, and much more. It might be a new topic for you as well. But don't worry, we promise to always be of help.
People increase their spending with their income because they believe that the additional goods and services can make them happier. Often these purchases only destabilize the monthly budgets. It is not difficult to manage lifestyle inflation. Since our first article, a monthly budget, the one we have been focusing on, is the key to ensuring that savings and investing goals are met. Eventually, the spending is capped to the amount of disposable income.
Here are a few more ways to ensure spending is controlled:
Overestimate the cost of buying and managing a product or a service: An expensive electronic will cost higher in repair. It is best to assume that the electronic device will need 10% of the cost every year for maintenance. Now add this additional cost for the first year to the product's price and match it with your budget. If the budget allows well and good, if not, step back and decide on a lower-priced product. If you already have a cheaper variant of this electronic device, use it for another year. Your annual increment might allow you to buy it in the new monthly budget.
Calculate the fundamental changes to your monthly budget: Remember Anubhav? Well, he did not account for higher variable expenses. The cost of cleaning and cooking was on him alone, so were the electricity and water bills. He might have even paid the monthly maintenance by himself. Once you plan to change how you've been doing something, do not overlook the additional costs you will bear while benefiting from the new way of doing things. It might have been prudent for Anubhav to take a private room in a shared apartment than a whole apartment. The costs stated will have increased, but by a margin only.
Invest in growth: Follow your monthly budget religiously. Instead of buying a car in debt, early in your career, establish a fund which can add up to a certain percentage of its price and use public transport meanwhile. Instead of hailing a personal taxi, share a taxi until your disposable income allows. Over a few years, not only will you be able to buy a car with minimum debt but know the in and out of public transport in case of an emergency.
Building wealth is a long game. It involves multiple decisions and following them religiously. Planning and execution play a crucial role in the success of a strategy, and it is not a different story in financial goal setting. Remember, you are planning to be wealthy, not rich.