How can we Eliminate Lifestyle Inflation?
Owning SUVs, living in bungalows and penthouses, wearing brands which we cannot even spell, eating out frequently and so many more such things can no more be categorized as luxuries. These things have become very common with all classes and account for a phenomenon called Lifestyle Inflation.
Almost all generations and class of people get affected by lifestyle inflation and get stuck in that near-endless trap. Lifestyle inflation happens the most when there is a sudden jump in the family income be it a salary appreciation or promotion or bonus or any other source. With increased income, expectations also increase.
For example, if you were earning Rs. 70,000 per month earlier, you had an EMI of your hatchback worth Rs. 15,000 and house rent worth Rs. 20,000 leaving you with Rs. 35,000. Once you got a promotion, your salary increased to Rs. 1,00,000, you switched to a sedan with EMI worth Rs. 25000 and moved into an apartment at a rent of Rs. 30,000 leaving you with Rs. 40,000. Effectively, only Rs. 10,000 is what you have as an additional source to your family income. Had you been driving the same car and stayed in the same home, you would have gained a family income worth Rs. 35,000, which could have earned you more returns by investing in SBI Bluechip Fund SIP.
Hence, it is very important that you realize how this different kind of inflation is affecting your family income and your overall finances. Just realizing is not enough but is the first step to avoid lifestyle inflation or at least to minimize its effect;
Table of Contents
1. Define your goals clearly
Goal setting is the primary step in every financial thing you do. Be it portfolio building, fund selection, risk management etc, your goals lay the foundation of all your financial decisions. Having clarity on your life goals and following them determinedly will prevent you from deviating from the path that helps you achieve them. If you are focused, any increase in income would mean an increase in the investment amount towards your goals.
If the surplus income goes into your future plans, you will not let the breeze of lifestyle inflation affect you, leaving you prosperous in the due course.
2. Have a Mix of Goals- Long and Short Term
Although long-term goals are the ones which are most important like retirement, education, marriage, etc but since it is going to take time for them to turn into a reality, they may leave you anxious and feeling incomplete. Hence, whatever surplus income you will have at hand, you would want to spend it in an instant-gratification thing. In order to keep pace with your short term and near-urgent requirement, you must set short and mid-term goals as well. These may be anything like buying a car or buying a home or funding higher education etc. This will keep your expenses in place as you would have a near-term goal to invest in.
3. Automate your transactions
Even before you get the hang of it, you must transfer the saving portion of your income to its ideal place, that is, Axis Long Term Equity Fund SIP. Automating investments not only simplify it but also keeps you safe from the risk of spending your money before you make the effort of transferring them to your investment portfolio. Not only for regular investments, but you must also automate your bonuses into your investments on a yearly basis. After every raise, calculate your appreciation you have earned and automated its transfer to your investments.
4. Don’t buy something if you can’t afford it (avoiding debt)
Avoid debt, be it of any type. Debt simply means you are living beyond your means which is a purely materialistic way of living. Purchasing something you cannot afford as of now will mean you spending your future income on a thing which will depreciate in value over time.
Debt is not an option until it is the last option. There are theories claiming good debt and bad debt but debt is debt. Try and avoid it to the maximum possible limits. The worst of all is the personal debt which most people take for going on a vacation or throwing a lavish wedding ceremony. This will not only have you liable to pay off the principal amount but also the heft interest on it plus there is no tangible thing at your hand. Vacations, parties, ceremonies are all one-time things gone with the wind.
And if at all by any chance and because of the circumstances you have to take a loan or debt, make clearing it off your priority.
5. Identify and Eliminate
This is the most difficult yet the most important step. You must identify your weak points as to the thing that pulls you into buying stuff or doing stuff. It may be a coffee shop or a special eatery or your favorite garment store or bookshop etc, identify these points.
Once you have identified, start eliminating. We do not mean that you completely stop doing what you like but if this is a regular habit, say you visit the coffee shop every two days, then it might become a problem. If you love coffee so much, learn how to brew it or save and invest money in the name of a coffee machine (ultra-short-term goal) and find yourself saving a huge amount you used to spend at coffee shops.
Lifestyle inflation is not an untreatable problem but needs a strong-willed individual who is bent upon investing for a better future. Once you start doing it, you will eventually become habitual of living consciously and save a great for yourself.