Lifestyle inflation is the tendency to increase spending as your income rises, which usually results in a higher cost of living. While it may seem harmless at first, an escalating spending pattern can have long-term consequences.
With many assets delivering impressive returns in recent months, it is easy to feel financially secure and justify your increased spending. However, if and when your income falls or your investment returns decline, the increased spending can lead to financial strain, making it difficult to maintain the same lifestyle during an unexpected financial situation.
How does lifestyle inflation impact your financial life?
- It derails your financial plan and goals
Just as the magic of compound interest can significantly grow your money over time, lifestyle inflation works exactly the opposite which is why it is also called ‘lifestyle creep’.
When more and more of your money goes towards maintaining a costly lifestyle, there’s less left for you to put towards important financial goals like a home upgrade, starting a business venture, or achieving financial freedom. Lifestyle creep thus can throw all financial plans off track.
- Establishes undue demands on future income
The more you spend now, the less you invest today. Accordingly, goal funding gaps increase. This means that you will need to invest a much higher amount from your future income to fund your goals. This is highly stressful as in the future you are also much older.
- Increases propensity for indebtedness
Lifestyle inflation or ‘lifestyle creep’ creeps in quietly and before you realize your spending has overtaken income and you have personal debt on hand. As an inflated lifestyle is something that you get used to very quickly, it is difficult to pull back spending and this often leads to mounting indebtedness.
- It makes you financially inflexible
Lifestyle inflation often means that monies are being committed to luxuries that are now considered as needs. It may also mean that your monies most likely would be going towards debt servicing of such purchases. The increased spending also means that if tomorrow you had to pivot your finances to service one goal to another or need urgent funds for an exigency, you may not have much of a surplus at hand. This makes your finances unwieldy and takes away the financial flexibility that low or no-leverage finances can give.
How to Combat Lifestyle Inflation?
Let us look at some strategies to fight lifestyle inflation.
- Delay urges of instant gratification, especially on big-ticket spending.
- Do not disturb the power of compounding in your portfolio.
- Continue committed savings, and increase them with every increase in income.
- Pay yourself first, which means prioritizing your investments before you spend.
- Understand the trade-off that may happen on an important goal funding by a big spend.
- Lastly, educate your family about the risks of lifestyle inflation.
When your younger generations and you become aware that a luxurious lifestyle needs lots of planning and discipline, they may find it easier to ward off the next ‘urge to splurge’ in favour of the family’s financial well-being and wealth creation priorities.
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