Are you affected by Lifestyle Inflation?
In one of our previous articles, we discussed the frugal living. The major obstacle faced in living frugally occurs because of one’s lifestyle.
Lifestyle inflation occurs when you increase your spending with a corresponding increase in your salary. Even though you are able to pay the increased bills, you are limiting your ability to generate long-term wealth.
Recently, I was having a discussion with one of my friends on this topic. His view is that 20’s or early 30’s is the time when one can have the most fun. In his words, “Life has only started and there are still 30 years to retirement. I want to have the maximum fun in next 5 to 7 years. After that, I would think about saving and Investment.”
But, there are few major issues in living with this approach:
You would never be able to truly realize the potential of the power of compounding. With increased lifestyle, you would never be able to save the amount required to achieve your financial goals.We have already discussed at great length on the power of compounding. Now, I would like to discuss more on the second issue with an example.
My friend is 28 years old and currently, earns Rs 65,000 per month. Apart from one LIC policy, he doesn’t save or invest.
The monthly breakup of his spending is as follows:
25% goes to home rent and maintenance i.e. Rs 1625010% goes for Cook i.e. Rs 650015% for buying groceries, consumables, etc. i.e. Rs 975015% in Weekend Spending for the month i.e. Rs 975010% goes for the household items taken on Rent i.e. Rs 6500 5% in Transportation Expenses i.e. Rs 3250 5% for Gym Membership i.e. Rs 3250 3% goes to Maid i.e. Rs 195012% Miscellaneous ExpensesHe is expecting an increase of Rs 5000 per month in his salary in this year’s appraisal. He has already planned that he would be buying a Tissot watch and buy a Royal Enfield bike.
Now, you must be thinking that with Rs 5000, this much cannot be achieved. He has planned to achieve this by using credit cards and taking EMI’s for the total due amount.
I listened to his expenses and was surprised that he was not even aware that he is living way above his means. A person with 65K in hand and no responsibilities should be easily able to save around 40% of his take home salary.
You must be thinking that “Why he is discussing so much about his friend?”. This is because so many of us are living such a lifestyle.
I want to ask you one question, “Can a person with such an ever-increasing lifestyle suddenly start saving 30% of his salary per month after 5 to 7 years?”
I want to provide an answer from my point of view which is an obvious “NO”.
I’ll give my reasons for the same:
Ever increasing lifestyle Habit of spending the money before it is even earned Pressure of Maintaining the lifestyle No discipline in the spending behavior Over-reliance on debt or credit card People are stuck so much in maintaining or increasing their lifestyle that they are not able to see the big picture. This can be your financial goals and responsibilities. This can be building a safety net for the future in case of any uncertainties in the job market or health.
25 years down the lane, what would look better, a “Tissot” watch? Or Rs 5 lakhs in your retirement savings when Rs 30,000 is compounded for 25 years at 12% CAGR?
Most of the people respond that this is not an appropriate way to judge spending decisions. I tell them that “Spending enormous amounts on materialistic possessions” is not an appropriate way to live life.
So, what do to if you are already stuck in the trap of lifestyle inflation?
Acceptance of your Lifestyle Problems
Just like my friend, many people don’t accept that they have a lifestyle problem. Acceptance of the problem would lead to a resolution.
If you are earning a decent amount and have fewer responsibilities, then you should be able to save at least 15-20% of your income. If not, then you may be stuck in the trap of lifestyle inflation.
Automate your savings and start paying yourself first
The easiest way to create long-term wealth is by deducting a set amount from your salary automatically. This will leave less amount with you to spend. If you don’t have the money, then your tendencies to spend would automatically decrease with time.
So, let us say you got a hike of Rs 5000 per month this year. You decide that you will divide this into 2 parts. The first part of Rs 3500 would go for achieving your financial goals. The remaining Rs 1500 can be used to indulge yourself in fulfilling a Want.
Avoid Increasing Housing Costs
Living in a metro city is expensive. Getting a decent home at a reasonable rate is getting tougher with each passing day. Also, the rents are increasing at a greater pace than at which the salaries are increasing.
But, make sure that deciding on the appropriate house doesn’t become an emotional decision. Everyone wants their dream home, which would eventually come on reaching your financial goal.
Changing and renting your home in a posh locality just because you can now afford is not considered as a wise decision. Set your priorities regarding what all facilities are required for a home and then make an informed decision.
Avoid Increasing Transportation Costs
Moving to and fro from home to office whether, by own car, cab or public transport also accumulates to a decent amount every month.
Try to make the maximum use of carpooling. Don’t be tempted to change the car just because you got a hefty bonus at the end of the year.
A car should be considered as a means of transport and not as a display of one’s status. It is a depreciating asset and its value will decrease with time. Don’t consider it as a means to display wealth.
Friends and Peer Group Matter
Our friends or our social circle has a very important role to play. Now, I am not saying you to change your friends. But, don’t let the peer pressure get on your nerves. You have your financial goals and those should be your priorities.
If you are currently partying 5 times a month, try reducing it to 2 to 3 times a month. Let your friends know about your new outlook on living life. Don’t be perturbed if they try to make fun of you or make you feel guilty.
It is your life and only you are responsible for improving it. Don’t judge and let yourself be judged according to the material possessions. The real freedom is achieved when you are financially independent.
Let me tell you by my personal experience. The real friends always stay with you irrespective of how you approach your life.
Don’t equate success with Material Things
There is no end to accumulating the materialistic possessions. Someone would always be having more than you, so do not fall into this peer pressure trap.
Always keep the focus on the greater picture and keep on following that path in a disciplined manner. You can live a good life by increasing your lifestyle in moderation. Simultaneously, you will also achieve the financial stability and peace of mind that comes attached with it.
The true measure of success is health, love, family, friends, and experiences. As long as you’re happy with your life, there is no need to prove to anyone else.
And trust me, my friend, start your journey to the financial independence now. And you would be the first one to retire from these mundane jobs and become an object of envy for others while they are still paying their debts.
Greater income would help you achieve your financial goals at an accelerating pace. The feeling to spend more to prove your success is tempting but not fruitful. You should continue to follow a disciplined approach and put your money to work for your long term goals.
Remember, “The Goal is to be rich, not to look rich”.