Lifestyle inflation refers to a hike in expenses, following an increase in income. The side effects of this inflation are many. It not only hampers long-term wealth creation but also leads to discretionary expenses, which can strain your finances and cause hindrance in achieving financial independence. Millennials, who form a 47 percent share in the working-age population, are most vulnerable to this kind of inflation as they believe in instant gratification. Read on to know how to combat this silent wealth diminisher.
Stick to a pre-defined budget
While a hike in income calls for a celebration, it shouldn't be at the cost of putting major goals at risk. It's essential to formulate a budget and stick to it to the T, this will help ensure that you spend on your needs, meet all liabilities and don't bite more than you can chew. In a tech-driven world, there are many apps which can help you budget efficiently. Using them can help you weed out unnecessary expenses and keep lifestyle inflation at bay.
Automatic investments lead to forced savings
One of the easy ways to save money, compound it and battle lifestyle inflation is to automate it. Many financial instruments, such as mutual funds give you the option to automate your investments. An SIP in mutual funds is a good way to get started. It's advisable to hike your investment by a certain percentage to accumulate a higher corpus. For instance, a monthly SIP of Rs 5,000 in an equity mutual fund offering 12 percent annualised returns for a period of 10 years can help you amass a corpus of over Rs 11 lakh. However, if you step-up the SIP amount by 10 percent annually, the end corpus will be above Rs 16 lakh.
Avoid lifestyle-related borrowings
Availing loans to meet various lifestyle-related needs is easy these days, thanks to fintech and justifying such borrowings with increased income is not uncommon. However, these borrowings often come with a high rate of interest, resulting in high EMIs that can significantly strain your finances. In the event of missing a single EMI, your credit score can take a major hit. Also, frequent borrowings paint you as a credit hungry borrower, which can be a roadblock in availing big-ticket loans in the future for more crucial needs such as buying a house, higher education of children, etc.
Be aware of your needs
Peer pressure has a lot to do with lifestyle inflation. Increased income is seen as an opportunity to live life like the affluent. The same can have a disastrous effect on wealth creation in the long run. Thus, it's important to be aware of your needs and make sure you spend only to fulfil them. Giving in to pressure to replicate someone else's lifestyle can bite you hard. So be absolutely sure about your needs and spend accordingly.
(The author is Head, Personal Wealth Advisory, Edelweiss.)