Dear subscribers, while going through ET Wealth I came across a novel concept – lifestyle inflation and thought of sharing with you allโฆ
Ever wondered why your household expenses are rising much faster than the inflation rate declared by government agencies? While most people blame the government for reporting lower inflation, they forget that the rise in their expenses is also due to the changes in their lifestyles. This is called lifestyle inflation and here are some ways to combat it.
What is lifestyle inflation?
Lifestyle inflation kicks in when individuals raise their standard of living following an increase in earnings. For instance, the concept of eating out has changed dramatically in the past 10 years. Not only are we eating out more often, but have also upgraded to swankier restaurants over the years. But the inflation is computed on the basis of the increase in food prices at restaurants we used to visit earlier. It doesn’t take into account the fatter bills we run up at the new eateries we now visit.
Lifestyle inflation is not necessarily a bad thing. After all, we work hard only to improve our standard of living. In some cases, this inflation is even unavoidable. You may have to spend more money to dress appropriately after a promotion. Similarly, it is natural for people to move to larger houses and buy bigger cars as the family grows.
Lifestyle inflation creeps up slowly without you realising it. If it is not managed properly, it can play havoc with your finances. The problem arises when people go overboard with lifestyle expenses. There are enough examples of people splurging on big cars, new gadgets, luxury holidays, and the like, after a big raise in salary, only to realise later that the increment was not big enough to support such a lifestyle over a longer duration. The rule of thumb while upgrading your standard of living is that you should be able to afford it on a sustainable basis.
How to combat it with budgeting
To keep lifestyle inflation under control, you must draw up a budget and stick to it religiously. "You need to assess your lifestyle objectively and see whether you can improve your savings rate. Budgeting also shows if you are living beyond your means and how you can bring down your expenses to fit your income.
Prudence demands that one should live within one’s means. Control the urge to splurge spawned by the profusion of malls, credit cards and online retail. Also, don’t upgrade your lifestyle immediately after a big rise in income. Give yourself time to identify the things you can afford on a sustainable basis. Don’t give in to peer group pressure and marketing gimmicks.
Budgeting also instils financial discipline and ensures that you don’t put investments on the backburner. It is best to put away a fixed percentage of your income every month. This way, your savings and investments will automatically keep pace with your income. Most people invest what is left after their expenses. You need to change this mind-set to spending what is left after investment.
Source: ET Wealth, Nov 11, 2013