What is lifestyle Inflation?
The lifestyle of inflation refers to the rise in spending habits of a person with an increase in income. Simply, it can be put out as the cash outflow increase due to an inflow increase. With the word inflation comes another concept known as deflection. While inflation associates earning and spending positively, deflation refers to conserved spending even when income increases.
Why Does Lifestyle Inflation Happen?
One of the primary emotions behind the sudden spike in spending habits is the tendency of people to increase their social status and match their friends and family. This keeping up with the Joneses’ attitude can lead to such inflation.
Examples of Lifestyle Inflation
We were absolutely fine with sharing a room with three roommates in our good old college days. There was almost sharing in everything from pizzas to burgers.
However, the same doesn’t hold true once we find a job. Let’s say the job’s starting salary is around $30 000. With it, we no longer found the sharing room comfortable hence rented a room of our own. Now, with this salary, we cook at home and treat ourselves to coffee by brewing it at home.
After six months our salary was revised to 50,000 dollars. With the increase in money in hand, instead of brewing coffee at home, we straight away went to cafes.
As time passes and revenue rises, such renovations and spending may become more common.
Many people wish to keep up with the Joneses and have a higher quality of life than their work or others. As a result, they desire to buy a more costly automobile or a larger house simply because others do.
This is a frequent strain in our culture, where individuals spend more money than they can afford on goods they don’t need.
How to avoid the pitfalls of lifestyle inflation
Have an emergency fund
Suppose you have an emergency savings account (usually three to six months of living costs set away just in case). In that case, you may utilize it to protect yourself against deceptive increasing spending over time. When your salary increases, put the extra money into your savings account instead of improving your lifestyle. If you have a financial cushion to fall back on if you have a sudden expenditure or a loss in income, you can avoid collecting a debt.
Start small and gradually expand your contributions until you reach your emergency savings target. When you do, you will be able to focus on other financial goals, such as debt repayment or retirement savings.
Stay aware of your spending.
It is critical to make deliberate selections regarding whether or not you require specific goods. Keep track of the amount you are willing to spend on items like fancy dinners, parties, drinks, etc. Once you have an idea of the amount that goes into unnecessary spending, you might end up saving the amount. Budgeting is a must to avoid lifestyle inflation.
Reach out to a financial advisor
Working with a financial counselor might help you get back on track as you make wise financial decisions if you have exponentially increased your spending after a raise in your pay.
When Is Lifestyle Inflation okay?
By now, you might have thought that having lifestyle inflation is a big no! But let us tell you, in some cases, inflation is okay.
Let’s say you are welcoming a new member to your home. For that, you will need separate expenses on food, rooms, clothes so on and on. These inflations cannot be avoided.
Similarly, if your current home has a water problem or electricity problem, earlier you couldn’t get a new house or renovate this one due to financial issues. But now, you can easily renovate your house with more cash flow.
Having lifestyle inflation is completely normal if it is to delegating some duties. That being said, it is critical to strike a balance and consider thoroughly before making any financial decisions since each one might affect your future.