LIFESTYLE INFLATION - A SILENT KILLER OF WEALTH
Inflation is a common enemy for all investors. It slowly deteriorates the purchasing power of your money. Inflation impacts your daily lifestyle in small doses, making it unnoticeable from one year to the next, but its aftermath at times can be devastating.
Lifestyle, on the other hand, is to be able to spend your life in your own way. Lifestyle is very subjective. It means different things for different people. The role of inflation is more or less the same in all the scenarios but it doesn't stop here. With rising income, we also tend to upgrade our expenses. In other words, if income increases by 1X times, our spending might grow 2X times, considering our new lifestyle or social status. This goes on year by year, and without us even knowing it, we get trapped in lifestyle inflation.
In this situation, when it comes to savings, you would hear people say that "I seem to earn more, but I still cannot save money". Well, this is how lifestyle inflation operates. It makes you spend more and more money to achieve a higher standard of living. It can occur anywhere, from everyday expenses (like a cup of coffee) to big purchases (like buying a car). As a result, there is more money, but the problem is still the same. And that is how lifestyle inflation becomes a silent killer of your wealth.
We all know that human wants are endless. When we reach one goal, we aim for another. It's nearly impossible for us to stop the desire to want more.
Let us assume Tom is a very hard-working employee in an MNC. When he starts his first job, he buys a used small car for his commute. After a few years, he got promoted and he upgraded to a brand-new car. After a few years, a new SUV replaces that vehicle. A short while later, a premium vehicle appears, then comes a better luxury vehicle, and so on.
A similar scenario can play out in every aspect of your life. These changes may seem small, but these compact upgrades in all aspects of life can add up to huge expenses that might take you backwards financially!
Lifestyle inflation is like a hole in a tyre. You can pump in air, but the tyre will not get full until you cover that hole. Now you might be thinking, How can I fight this inflation?
In all honesty, it is challenging to compromise on lifestyle and accept something less than what you desire. It affects your self-worth, dignity, and any potential social perceptions. However, in order to assure your financial security and sustainability, you need to look beyond and take the necessary steps. Let's look at some strategies for avoiding/overcoming the lifestyle inflation trap.
Don't Follow The Status Quo!
The need to keep up with others is likely the main contributor to lifestyle inflation. People today feel the need to have an iPhone, a brand-new car or other luxuries, which in reality is not a need. The excitement of having these things may or may not last for a month, but it will definitely put a hole in your pocket. In many cases, people spend beyond their earnings. So instead of saving some income, they spend all of it and then incur more debt to afford luxuries. Being in debt is hardly a good idea but to be in one to keep up with the status quo is even worse. Keep in mind that bigger is not always better. Therefore, always think about the long run, and consistently work on increasing your savings & achieving your financial goals first. Planning your financial goals in advance will help you figure out these things quickly and be on your path to financial security.
Consider The Priceless Value Of Your Purchase:
As most people say, you can't put a price tag on relationships. So, it's always a good idea to consider the non-monetary benefit of your purchases. For example, buying a BMW may give you some happiness, but the fancy will fade with time. Hence, it is short-term. However, spending money on a family trip for a week holds a better non-monetary benefit for your emotional well-being. This preference may differ from one person to another, but it's good to consider the non-monetary side of your purchases to avoid overspending.
Sort Out Your Financial Priority.
Another way to deal with this inflation problem is to get serious about the lifestyle choices you make & start thinking in terms of needs & wants. 'Needs are imposed by nature, Wants are sold by society.' This method is the best way to determine where the lifestyle inflation has hit you. Prioritize your current needs & future needs first, then consider your wants. Don't increase your spending by building a gap in your financial goals. Save for them first. Developing the financial priorities will lead you to secure financial well-being in the long run.
You can greatly assist your ability to shrug off temptations by setting financial priorities you're determined to meet. When you notice your top objectives, like providing for a sustainable lifestyle in your later years and a high-quality education for your children, you will consider purchasing a lightly used car and starting to construct an education or a retirement fund.
Having said this, you should also not discourage all your expenses. You just need to think carefully before spending and spend wisely. Balance your financial strength & your present lifestyle.