Understanding lifestyle inflation can save your wealth from eroding

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“May headline CPI inflation unexpectedly rose 210 basis points to 6.3% on unfavorable base effect,” “May’21 CPI headline/core inflation a shocker at 6.3%,” or “Core inflation rose from 5.1% in Apr’21 to 82-month high of 6.3% in May’21,” are examples of the news headlines on inflation that we came across. There is also one category of inflation that is never highlighted and can be a wealth killer for your retirement corpus if ignored. This inflation is known as ‘Lifestyle inflation.’

What is lifestyle inflation?

Inflation affects your savings, which does not have the same worth at maturity as it has now. People are always looking for ways to fight inflation by investing in something that will provide a higher return. To understand lifestyle inflation let’s take an example.

Take, for example, Sunil, a manager at a prominent MNC receives a pay increase from Rs 60,000 to Rs 80,000. However, he incurs an increase in costs from Rs 40,000 to Rs60,000, owing largely to an upgrade in lifestyle in terms of expenditure on renting 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 costs moves in tandem with an increase in income. 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?

One major cause of lifestyle inflation is people’s belief that they have earned a specific way of life. Another factor contributing to lifestyle inflation is people’s drive to impress their friends, often known as the demonstration effect. In the demonstration effect, you tend to match your living standards to those of your neighbors, acquaintances, and co-workers, a phenomenon is known as “keeping up with the Joneses.”

Lifestyle inflation has a negative impact on people since money is borrowed and spent ahead of income, which can lead to debt build-up over 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.

The long-term implications include that you may not be able to do anything about your retirement planning, and you may discover that you have no “style” left when you retire. Yes, a rise in income is a 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 view in mind.

Even while regular retail inflation eats away at your savings and assets by lowering their value, financial planning to protect your future from the impact of common retail inflation must be taken into account as well. It is imperative to diversify your asset class while investing to beat the retail inflation as well as earn high returns.