Every one of you must have experienced this situation in life. You start spending more the moment you start earning more. As soon as you get the much-deserved promotion, your monthly expenses rise correspondingly. A college graduate embarking on his career finds a decent home on rent for INR 15,000 a month. It is a modest house in a good locality with hospitable neighbours. A couple of years later, you see him getting a raise in his salary. Immediately, he shifts to a new neighbourhood and a new home at INR 25,000 a month. He did not change because he needed to, but because he could afford to do so. It is a classic case of lifestyle inflation. Should anyone have a problem with that? You argue that you are still able to pay your bills on time. But, the fact is that you are limiting your ability to build your wealth.

Lifestyle Inflation – Why it happens?

• Your mentality matters a lot:

Have you heard about the “Keeping up with the Joneses” mentality? Just because your neighbour is enjoying a lavish lifestyle, you shouldn’t follow him blindly. However, this is what happens in life. You see your neighbour moving around in a BMW whereas you have a Honda Accord. On getting the much-deserved raise, you upgrade your Honda Accord to a BMW even though your Honda Accord is in perfect working condition and doing its job pretty well. The “Keeping up with the Joneses” mentality is the principal reason for lifestyle inflation.

Do you mean to say that we should not enjoy ourselves in life, especially when we can afford it?- is the most common refrain we get. No, we do not mean that you should not indulge in rewarding yourself for the hard work you do. You are free to spend your money in the way you want to, but it should not be detrimental to your future financial health. You get used to a new lifestyle. In case things do not work as per your plan, you will find it difficult to return to a previous version. Aviva Wealth Builder is one such plan that helps you save for the rainy day!

Lifestyle Inflation – Specific occasions do require additional expenditure

• Circumstances justify lifestyle inflation

You have just had a promotion in your workplace. You need to improve your wardrobe to meet the standards of dressing that the additional responsibility demands. It is perfectly fine for you to invest in a set of new clothes so that you do not feel out of place. Similarly, you have a new addition to your family in the form of a baby. There is a need to shift to a bigger house so that your baby does not disturb the other elders in the home. You can justify such spending on a professional as well as a personal level.

It makes sense in improving the quality of your life as long as you can balance the same. Your extra responsibilities in your office take up additional time. Hence, you might not find the time to mow the lawns or clean your car frequently. Employing others to do these jobs for you allows you to concentrate more on your family. They get the much-needed attention. It promotes a healthy work-life balance making you more productive at work.

Can you avoid lifestyle inflation?

• Make sure it does not become a habit

Some level of lifestyle inflation is unavoidable, but you should remember that your spending decisions today can affect your financial situation tomorrow. The issue with lifestyle inflation is that the increased spending that results from lifestyle inflation can become a habit. You could end up spending more to maintain the new standard of living.

• Plan for a retirement corpus

Having a retirement corpus is vital. Hence, investing early in life can help you build up a sizeable corpus. You can take the help of Aviva’s online wealth planner calculator to decide on the quantum of investment you need to build a decent retirement corpus. Assume you get a raise of INR 10,000 per month. Investing INR 6,000 per month at a nominal rate of 7% for 25 years can end up in a corpus of around INR 50 lac (Assuming that you are 25 years old today).

• Distinguish between your needs and wants

Of course you need to spend but it is pivotal to distinguish between your needs and your wants. Some purchases like clothing, food and so on are necessary whereas you can manage without your desires (like your new smart phone worth thousands). What you must remember is that the earlier you start investing, the more significant corpus you end up with to meet your retirement needs. The dividing line between your needs and wants is a thin one, but must find a way to balance it out, and only you are in charge of that!

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