Inflation is a harsh reality, and costs of goods and services are constantly rising in practically every area, including food, housing, education, and medical bills. Needless to say, such acts of defiance have long-term implications and, more significantly, eat away a person's life savings over time. One such type of inflation is lifestyle inflation.
When one's income goes up, their expenditure rises with it. This is known as lifestyle inflation. It tends to repeat itself with each rise, making it increasingly challenging to pay off loans, save for the future, or achieve other financial objectives.
In some ways, lifestyle inflation is referred to as a wealth-killer, since even before the individual realizes it, he or she has spent a significant amount of money on items that are not necessary.
According to reports, Michael Jackson, the King of Pop, made almost $2 billion in his lifespan. However, he left the earth in 2009 with a loans of over $400 million, which he may never have been able to repay owing to his extravagant spending behaviors.
What could be the possible reasons behind lifestyle inflation?
- Believing that buying more/better things would make you happier.
- Simply avoidance of any budget.
- Rather than investing, the extra income is spent.
- Making impulsive purchases as a result of social media marketing and peer pressure.
- Getting habituated to pricey items and upgrading on a regular basis.
Consider the case of A, a college student who was recently hired by a company.
He survived college on a monthly allowance of Rs. 6,000, a cheap smartphone, two pairs of footwear, and a used bike. However, he now earns Rs.60,000 per month. So he moves into a two-bedroom flat, buys five pairs of fine shoes, a brand new sports motorbike, and a latest iphone. He abruptly raised his expenditures in order to maintain a higher standard of living.
Now, owing to his good work , he receives a salary increase of Rs. 30,000 the next year. So he gets a new iPhone, gets a dog, buys six more pairs of decent shoes, a pair of costly sunglasses, and an expensive suit . As a result, his living expenditures have increased again.
A's income has risen consistently throughout the years, so this pattern hasn't changed. He gradually gets to save less and fails to accomplish his major financial goals, forcing him to take out loans.
What can be done to avoid a scenario like this?
- Comparisons of lifestyle with people should be avoided.
- Set a flexible budget and try spending according to it.
- Recognize that there is no such thing as a perfect lifestyle, and you will always fall short.
- Investing should be automated.
- Whenever your income rises, be sure that a portion of it goes to investing.
- When possible, avoid using your credit card for purchases that do not have a discount.
Lifestyle inflation may have far-reaching repercussions since it negatively impacts individuals because money is frequently borrowed and consumes excess of incomes, resulting in debt buildup. This commonly leaves the individual with insufficient funds to deal with unforeseen circumstances such as unexpected job loss or life altering disease.
While a rise in income is certainly cause for celebration, it does require a set of challenges. Expenses are addicting, and they seldom decrease. However, this does not rule out the possibility of limiting lifestyle inflation. If one is genuinely dedicated, they may offset lifestyle costs in a variety of ways. Broadly stating, to overcome lifestyle inflation it's critical to keep track of your expenditures.