What is lifestyle inflation and how does one financially plan for it?

If you feel you’re falling prey to lifestyle inflation, here are five remedial actions to combat this silent wealth diminisher.

What is lifestyle inflation and how does one financially plan for it?

Roti, kapda, aur makaan’ was a popular slogan back in the 1960s and 1970s. But Indian life goals have evolved over time. Buoyed by higher disposable income and aspirations moulded by film stars and social media influencers, millennials today want the good life. 

The urban Indian wants to live in a swanky gated complex, keep a pet for companionship, aspires to travel abroad once every year, watch every new movie release, and attend concerts and plays. They need to socialise frequently and tend to shop online as a hobby.

As India’s vast middle class throws caution to the wind and turns aspirational with a vengeance, its priorities have changed. This has resulted in a sharp increase in discretionary expenses over the past decade. While expenditure on non-essentials accounted for 5%–20% of a monthly budget ten years ago, today it accounts for anywhere between 20% and 60% in an urban household.

Related: 5 Easy ways to reduce your monthly expenses 

Changing life goals

Millennials today are highly inclined towards unconventional life goals. As per a survey by ET Wealth, saving up for children’s education, purchasing a house, saving for retirement, buying a car, and provisioning for children’s marriage were the top five goals of an Indian household a decade ago. Children’s education is still a priority today, but going on vacation has outstripped the need for a roof. 

People are spending a lot more on their ‘wants’ without ascertaining the ‘need’. Mobile handsets and accessories have to be upgraded every year. Similarly, expenses related to health and fitness are not just restricted to gym memberships. One needs a whole new workout wardrobe, accessories, and expensive dietary supplements. 

Some spend on fitness, while others may be inclined towards gadgets, luxury items, or hobbies. Urban Indians may be optimistic, but they are inadequately prepared to deal with lifestyle inflation. This can have long-term repercussions on their financial goals.

Related: A 9-Point Guide to achieving long-term financial goals 

Gearing up for the challenge

Despite doing well in the workplace and earning higher salaries, many millennials treat their bank balances just as they did when starting their careers. If you feel you too are falling prey to lifestyle inflation, here are some remedial actions you can take to combat this silent wealth diminisher.

1. Review your lifestyle needs

There is no harm in upgrading your lifestyle as your disposable income increases. The issue is when you don’t realise the lost ‘opportunity cost’ of spending your hard-earned money on things that are not necessary. Remember, not all lifestyle expenses are big purchases. These days, most of us don’t think twice before booking a cab or ordering food online. Such a small individual transaction may seem harmless but it can have a snowball effect on your long-term finances as well as your health.

Cleaning up your act starts with being mindful of your spending habits. As the adage goes, a rupee saved is a rupee earned.

Related: 5 Ways to make saving a disciplined habit 

2. Live within your budget

Having a well-chalked-out, predefined budget is the best way to account for your expenses. Prioritise all essential expenses like EMI/rent, utilities, investments, and liabilities before you allocate financial resources to your lifestyle needs. Discretionary expenses should be capped at a maximum of 20% of your take-home income. Download an app that can help you budget efficiently; it will force you to rethink your lifestyle-related spending and eliminate unnecessary expenses.

3. Prioritise your financial goals

Sit with your family and create a plan for your financial goals. You need to classify your goals as short-, medium-, and long-term, and list down the means to achieve them. You may want to pay off debt, buy a house, save for your child’s education, or plan for retirement. Make a timeline of your goals and focus on your investments accordingly.

Salary hikes, incentives/commissions, bonus, or any windfall gains should be directed towards fast-tracking your financial goals. Without clear objectives it is easy to spend on things that will hamper your long-term wealth creation.

Related: A 9-Point Guide to achieving long-term financial goals 

4. Automate your investments

A smart way to combat lifestyle inflation is to automate your investments. Set up standing instructions with your bank to sweep money out of your account every month after your salary is credited. Even a modest Rs 5000 invested through the SIP route in an equity-based mutual fund that offers an annualised 12% return will compound your corpus to over Rs 11 lakh in 10 years. 

A structured investment approach may not offer instant gratification but it ensures that your lifestyle is not affected in the long term.

5. Avoid lifestyle-related debt

Lifestyle-related loans have become easily accessible; they come pre-approved and with flexible repayment options. Alternatively, one can simply swipe a credit card. Today, you can buy almost anything on EMI. However, such enticing offers usually come with high interest rates and affect your credit score. So be careful when intending to buy now and pay later; you could be biting off more than you can chew.

Now that you know what to watch out for, follow these tips and beat inflation to live the life you deserve!


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