In the year 2022, we have seen inflation rising on account of liquidity as well as logistical disruptions due to Covid-19 and the Russia-Ukraine war. These events led to high inflation in the developed as well as the emerging market economies. As inflation directly impacts our ‘cost of living’ it is important to know how exactly does it impact and how this could create funding gaps in your finances in the future creating unnecessary financial hurdles crisis for you.
In this blog we have tried to simplify the concepts related to ‘cost of living’, impact of inflation and lifestyle inflation on your cost of living and what items you should watch out for.
What is Cost of Living?
Cost of living simply measures the expenses related to living your current lifestyle. So, what all expenses should you include in your cost of living? Practically everything that you spend on currently. Majority of one’s expenses will be related to the family’s cost of living like housing rent or maintenance, grocery, healthcare, education, utilities, clothing, etc. These are the major expenses in computing your cost of living but do remember to add expenses related to EMIs and insurance premium as well.
How is the cost of living linked with inflation and lifestyle inflation?
Inflation could be explained as the rise in the prices of goods and services over time. As inflation increases, the cost of living increases. As a result, your expenses move upwards over time. Hence, you can buy less items for the same money, or in other words you have to spend much more, to buy the same goods and services that you are buying previously.
Cost of living also increases with lifestyle inflation. Lifestyle inflation comes into picture as and when an individual’s wealth increases and the incremental income and wealth is used for consumption and spending and not for investment purposes. As a result of lifestyle inflation, an individual raises his or her standard of living by buying premium products and services when earlier she was content without those.
How is your cost of living linked with your Financial Plan?
Your cost of living determines and guides your cash flows. Cash flow planning then leads to savings and investments. Your current cost of living determines how much amount you would be needing at every stage of your life.
So, it is very very important to understand current cost of living so you can understand how you will save and invest for the future.
For example, if your income is Rs. 100 and your cost of living is Rs. 70, then Rs. 30 is available for a savings and investments plan. If your wrongly estimate your cost of living, your investment planning and funding for future goals such as child’s education, and your retirement can go all wrong.
Good estimation of cost of living leads to better financial planning.
Cost of Living crisis!
In 2022, many developed countries are facing the heat of inflation and this is choking their economic growth. This is also leading to job losses and layoffs. This is forcing many individuals to cut down drastically on discretionary spending and overall cost of living.
Each and every crisis brings a lesson in it’s disguise. This crisis that has hit many developed nations teaches us that keeping a track on spending is important. Also, it teaches us that maybe it’s okay to cut some unwanted spending in the good days, so that money saved could be used for a rainy day, in case this crisis hits home.
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