Millennials are born to see the world from a different perspective. They have grown up to see the world deal with quite a few intricate issues. From socio-economic to environmental to personal well-being, this generation is trying to deal with it all. Then there is the issue of money and its importance. Why do you stress on that you ask? Well no matter how much we try to take things passively, Money is important to survive in today’s world. An important issue regarding money management is Lifestyle inflation.
What exactly is lifestyle inflation and why should you pay attention to it?
Lifestyle inflation refers to an increase in spending when an individual’s income increases. This might not look problematic at first, but it is something worth thinking through. Your income increase and your lifestyle evolve. You start spending to keep up with your lifestyle. The bills, loans & EMI and interests start piling up and your retirement saving starts taking a hit. And before you know it, a vicious cycle has sucked you in.
Why is lifestyle inflation so essential and why so should pay little attention to it?
Lifestyle inflation when simply put is living from one paycheque to the next. You just have enough just to pay the bills. You are unable to save for the future even if you wanted to because you have so many bills to pay. This all comes down to the fact that you have inflated yourself into a lifestyle according to your income. Lifestyle inflation is the outcome of human nature to want more and more. Take the example of Elena, an economics graduate studying at a public university. She studied as well as worked part-time to meet her monthly expenses. This was very convenient for her during her student life. She was able to meet her needs and shared an apartment just outside the university campus to keep her expenses low. Then she graduated and was offered a job as an analyst in an audit firm in a big metropolitan city. She rented a one-bedroom apartment, started learning an instrument, frequently went to attend opera, and dinned in 3-star restaurants among other things. The thing here is that, instead of spending most of her salary on extravagant items, she could easily have saved a portion of her salary for a rainy day.
The most important thing about lifestyle expenses is the social pressure to keep up with your neighbours, your colleagues, family, friends, or someone you really look up to. This never keeps the spending of a person in check. You buy that house, then the car, the expensive trip abroad and so forth and so on. There is another reason, the sense of rewarding yourself after the hard work you have put in to achieve what you have and where you have reached. No person will deny that occasionally spending on luxury is not bad. And it is not as if spending on your personal development is bad. To develop a new skill, improving your living standard is a reasonable reason to spend money. It is the overspending that makes you financially unstable and slides you into the classic pit of spending more than you make.
How should one not fall victim to lifestyle inflation and overspending?
Some basic points to remember when you think about splurging money after your promotion or your big bonus. Is this expense really required? Can I avoid spending this cash on this item? Can this necessity be postponed? Asking these simple questions to yourselves can help mitigate your spending on unnecessary items and keep your lifestyle in check. Your financial well-being is very much dependent on your saving habits. Financial well-being is something which is worth pondering for the millennial generation. Especially considering that economic disparity in the world is widening day by day. According to the July 2020 Simplywise Retirement Confidence Index, 62% of Americans are more concerned about retirement today compared to how they were feeling about it a year ago. You should be able to have some savings for a time when you might really need it or your retirement.
So how do make yourself financially independent and not get caught up in lifestyle inflation?
Follow these simple and easy points before making any money-related decision which might help you:
- Avoid taking on more debt: Just because your salary has increased, and your bank has raised your credit line does not mean you can truly afford the new car/house on the EMI payment plan. The interest alone can dent your monthly/yearly budget.
- Always make a budget: Lifestyle inflation is not something which can be completely avoided. But if you plan properly you will find yourself in a better position financially more often than possible. Keep a track of your necessary monthly/yearly spending and plan for the next period accordingly.
- Quit matching up to your neighbour/work colleague: Financial independence is not a status symbol you need to keep up. Just because your neighbour went for a 3-day beach trip, does not make your day-long hiking in the woods less of an adventure. Stop letting other people dictate how you or your family enjoy your life. Enjoy it according to your way with your means.
- Stay invested for the long term: A long-term investment is not taken seriously by the majority of the population & it yields surprising results. For example, if you had invested $1000 in Microsoft shares during its IPO in 1986, your investment would have fetched you $1.6 million in 2018. Yes, a million! So being invested for a longer duration even if it is a small amount is a great investment. That is not a bad proposition after all.
These small steps will help you become financially independent. And you can still enjoy spending on your weekend trips or guilty pleasures from the savings that you carved out from being financially sound.
