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Are you a victim of lifestyle inflation? Here's help

Last updated on: September 16, 2019 12:11 IST

'Just like humans binge on food when they are depressed, they also tend to shop for instant gratification. which is just temporary. Please do not fall into this trap,' cautions Sheetal Jhaveri.

Illustration: Dominic Xavier/Rediff.com

Sam Ewing, a former baseball player, best described inflation thus: Inflation is when you pay 15 dollars for a 10-dollar haircut you used to get for five dollars when you had hair!

How many of us can relate to this? Most of us!

 

Believe it or not but reports last year suggested that salaries in India would increase by 10 per cent in 2019. Salary hikes are followed by better lifestyles, by buying the latest and most expensive mobile phones, electronic gadgets, designer clothes... the list goes on.

Many Indians now have more than one car per household in comparison to hardly one car just 10 years ago. Restaurants which saw crowds only over the weekends are now seeing 70 to 80 per cent occupancy even on weekdays.

Moviegoers flocking to multiplexes after buying tickets as high as Rs 500 or more without batting an eyelid, have also increased.

So what is lifestyle inflation?

Lifestyle inflation means the increase in one's spending in proportion to an increase in income. In short, salaries have gone up, spendings have gone up and savings have gone down.

Isn't this what everyone has been doing?

In the current economic gloom, maintaining the existing lifestyle is becoming more and more of a challenge.

Just recently, a friend of mine was quoting her husband, owner of a small business, 'There is severe liquidity crunch. I am not getting payments on time. We better cut down on our expenses. Think twice before you spend.'

My friend was like, 'Where do I cut down?'

The only thing she could think of was to stop going out for dinners and coffees as often as they used to.

We are so used to this exorbitant lifestyle that cutting down or lowering one's lifestyle just doesn't seem possible.

There is no harm in buying materialistic things but that has to be within limits. Recently, quite a few big names have filed for bankruptcy or have been facing a financial crunch. Besides demonetisation, the other big reason is over-borrowing. The same is happening with individuals who get caught up in a debt trap to maintain their lifestyle.

So how can we avoid lifestyle inflation?

I am not asking you to be frugal but here are some pointers to bear in mind to avoid falling prey to this inflation cycle. First and foremost, remember:

It can affect anyone: India's gross savings rate was at 37.8 per cent in 2008. Since then there has been a steady decline, with gross savings rate reaching 30.5 per cent in March 2018. So where is the money going?

In coping with lifestyle inflation, taking exotic vacations, eating out, etc. In the current economic scenario everyone is feeling the pinch, and hence first prepare for rainy day then spend.

Luxury has become a necessity: Over the years, with an increase in earnings, luxury items like smartphones, designer clothes have become necessities. There is no harm in indulging yourself but all these should be after you have had your insurance policies, emergency funds and savings in place.

Don't give in to the charm of every new product that catches your eye. All material things lose their appeal after a point. Learn to differentiate between what you fancy and what you need.

Indians have started travelling abroad, which is fantastic as it broadens one's perspective towards life. But many young couples do it on borrowed money which is where the problems start. Learn to keep your borrowings under check lest it come back to haunt you.

Beware of offers: Of late, you are bombarded with a plethora of messages from big clothes brands, electronic brands and the automobile sector trying to lure you with lucrative deals. Human mentality leads us to buy these things thinking that they are actually making us save money. Remember, 'SALE' means the company wants to make a sale; it's for them, not for you.

In fact, sometimes you end up spending more than your initial budget and after coming home you realise there are many items which ideally you do not require and now lie unused.

Spending to maintain the state of happiness: Hedonic treadmill, or Hedonic adaptation, according to Wikipedia, is the observed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes.

Just like humans binge on food when they are depressed, they also tend to shop for instant gratification. which is just temporary. In the present economic turmoil, please do not fall into this trap.

Maintaining a particular lifestyle for the benefit of others: One of the richest men in the world, Warren Buffet, still lives in the same house he has been living from the time he started investing. Although I am not saying you have to deprive yourself of new belongings, the point is, just to show off your wealth or to compete with your friend who has the latest car or has just been back from an exotic vacation you don't need to spend or, much worse, borrow to spend.

Social media has made sure everyone can peep into other people's lives. Please avoid spending your money based on other people's expenditures.

Last and the best way to avoid falling into lifestyle inflation trap:

Cash flow statement: Always maintain an expense sheet. Once you start maintaining an expense sheet on a daily basis, you will automatically tend to be more cautious while spending. You need to maintain the following fields:

  • Your earnings from all sources
  • All your mandatory expenses
  • Your outgoings for any savings/investments you are doing
  • All your voluntary expenses (this is where you have scope for controlling expenses)

Even if these fields are not maintained on a daily basis, at least a monthly expense sheet is a must. Not only will it help you in controlling your expenses but also to chart out a sound financial plan.

Be a mindful spender. Save wisely and spend wisely!

Sheetal Jhaveri, MBA (Fin) and Certfied Financial Planner, is founder of Dhanplanner, an investment advisory

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