How lifestyle inflation can impact our financial stability

Published: September 20, 2019 at 10:21 am

Last Updated on September 20, 2019 at 10:21 am

We often focus a lot on regular inflation while planning for our goals and cash flows. But a very important aspect which gets missed is ‘Lifestyle Inflation’. This is the concept where a person increases their expenses when there is an increase in their income, in addition to the regular increase in the cost of goods. Sebi registered fee-only investment advisor Vikram Krishnamoorthy discusses solutions in this article.

About the author: Vikram is a member of fee-only India (FOI) and part of the freefincal fee-only planner list. He is an MBA in Finance and a Post Graduate in Financial Planning from Canada. He provides fee-only financial planning and investment advisory services for individuals and families from all over India. His website is: insightful.in

Lifestyle Inflation impacts all age groups, but especially young people. We often get excited when our income increases, and we tend to increase our lifestyle immediately. For example, a person with a decent salary pays an EMI for his car worth 7 lakhs and rents an apartment for Rs. 15,000. He gets a promotion with a salary increase of 25%. As a result of this increase, he upgrades his car to a 12 lakhs car with a higher EMI and moves to a new apartment with a rent of Rs. 25,000. This is a simple case of lifestyle inflation.

In my opinion, the difference between ‘can spend’ vs ‘should I spend’ is one of the biggest factors that define a person’s long-term financial success. Just because you can increase your lifestyle, it does not mean you have to. An extreme example of this is the lottery winners in the US. More lottery winners go bankrupt faster than the average person because they never think about the long-term sustainability of their lifestyle. They increase their lifestyle multi-fold immediately and are not able to sustain it after a while.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

There is no end to how much we can increase our lifestyles. This cycle of increasing expenses every time there is an increase in income makes it difficult to achieve your goals and attain financial freedom sooner.

Impact of lifestyle inflation on personal finances

You achieve Financial Freedom when you are not dependant on your ‘active’ salary income or business income to maintain your lifestyle. The money you need to maintain your lifestyle should come from ‘passive’ sources. This passive income can be achieved only when you save up enough to generate that income.

You will not achieve financial freedom if you keep increasing your lifestyle proportional to your higher income, and not increasing your savings towards generating passive income. You may always end up living paycheque to paycheque and getting caught in the spending trap.

‘Income’ is not the only metric for financial success, it is only one side of the equation. The other side of ‘expense’ is as important. Often, people focus so much on trying to increase their incomes but ignoring what is happening to the other side. A person earning 1 lakh may have more financial success than a person with 2 lakhs income and we often see that a person with a lower income having a larger saving than a person with a higher income.

How should we approach this?

There is nothing wrong with wanting better things and raising your lifestyle. The important thing is to focus on the long-term lifestyle sustainability first, rather than just focusing on your current lifestyle. In fact, it becomes very difficult to reduce your lifestyle once it goes up, and we end up making bad decisions to maintain our higher lifestyles. As a result, many people go bankrupt too, getting into debt to maintain it.

You should try to guarantee your current lifestyle for the rest of your life before increasing your current lifestyle. When you have an increase in family income, understand how that can be used to achieve financial freedom faster to automate your current lifestyle.

Make gradual increments to your lifestyle. There’s nothing wrong with stepping up your lifestyle as you earn more but resist the urge to make big jumps suddenly. Do it gradually, trying to put most of the additional new resource towards guaranteeing your future lifestyle.

Most people make bad decisions when they don’t understand the long-term impact of an immediate small decision. When you have a financial plan, you understand the ‘cause and effect’ of every decision you take today. You will be able to understand how your spending today is impacting the long term picture and may reduce your chance of making temporary bad decisions that may adversely impact your long term financial stability.

Financially successful people are not necessarily the ones who have the highest incomes or the best cars and houses. They are people who are financially free, not dependant on their active incomes to maintain their lifestyle. Some people who look to live a high life, spending on material things to showcase their financial success, may in reality not be built on solid ground.

When you spend everything you have today, remember that you are borrowing from YOUR future financial stability.

Being able to sleep well at night knowing that no matter what happens to your job or business tomorrow, your current lifestyle is guaranteed for the rest of your life is true financial freedom.

In summary

-An increase in income should first increase your savings, not your expenses.

-Your income alone does not necessarily define your long-term financial stability and success, your savings does.

-There is nothing wrong with increasing your lifestyle. However, make gradual changes, not drastic sudden increases.

-Have a plan, so you can understand the ‘cause and effect’ of your current spending decisions, and focus on achieving your goals and financial freedom at the earliest.

###

If you wish to work with Vikram, his website is insightful.in

 

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)