How lifestyle inflation is eroding your wealth and what you should do

• Follow

People always search for methods to fight inflation thereby investing in something that will provide a higher return. There is one category of inflation that is less talked about but can be a wealth killer for your retirement corpus if ignored. The inflation is called ‘Lifestyle Inflation.’

What is lifestyle inflation? To understand lifestyle inflation, take, for example, Mr Sunil, a manager at a prominent company and receives salary hike of Rs 20,000. His pay increases from Rs.60,000 to Rs.80,000. However, his personal expenses also increase from Rs.40,000 to Rs.60,000, owing largely to an upgrade in lifestyle in terms of expenditure on renting on a larger property, as well as a switch from a local holiday to a foreign holiday.

As a result, this phenomenon is known as Lifestyle Inflation, in which a rise in income moves in tandem with an increase in expenses as well. In simple words, a rise in income leads to an increase in costs. For instance, a rise in pay causes a person to spend more on rent, electronics, vacations, personal care, education, and so on.

How it impacts you? Lifestyle inflation has a negative impact on people since most of the time money spent here is more than your income. This can lead to debt build-up over the time. This leaves a person with little money to deal with emergencies such as an unexpected sickness or job loss.

As a result of the disruption this also impacts your financial goals and objectives and, in the end, there will be nothing left to plan for retirement.

Yes, a rise in income is cause for celebration. However, expenditures are addicting, they seldom, if ever, decrease. There are various methods for combating lifestyle inflation. That said, it is critical to keep track of your spending. Individuals must plan their monthly expenditures. Also, maintain a short-term and long-term financial goals in mind.