Lifestyle Inflation and How to Manage It?

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Life is packed with experiences and changes and with every progress you make, you might find yourself wanting more. You may upgrade your phone, order gourmet food items or even choose to dine at fancier places. This gradual increase in expenditure with the rise in income is called lifestyle inflation. While it is natural for you to relish the fruits of your hard-earned money, substantial lifestyle inflation can hinder your future goals and financial stability. Discussed here are the causes that result in lifestyle inflation and prudent stepwise measures you can take to protect your financial well-being.

Causes of lifestyle inflation –

Also addressed as “lifestyle creep”, lifestyle inflation happens when you begin spending more money with the rise in your income.

There are many causes of lifestyle inflation, including:

Keeping up with the Joneses: We all want to live a good life, and it can be easy to get caught up in the comparison game. If your friends and neighbors are buying new cars and houses, you may feel pressured to do the same, even if you can't afford it, societal pressure may propel you to think you must keep up with the current trends and follow the herd
Subconsciously raising your standards: As you earn more money, you may start to expect a higher standard of living. This can lead to you spending more on things like food, clothing, and entertainment.
Not tracking your spending: If you don't track your spending, it's easy to overspend without realizing it. This can lead to lifestyle inflation, even if you don't intend to spend more money. Social media and even ads play an essential role in determining your desires, encouraging you to spend on unnecessary items or services

Smart stepwise measures to avoid lifestyle inflation –

Evaluate your crucial financial goals

Begin by setting financial goals for the short, mid, and long term. Doing so will endow you with a roadmap and purpose for money management. When you know what you're saving for, it's easier to resist the temptation to spend money on unnecessary things. Note that it is crucial to strike a balance between enjoying today and financially securing your tomorrow.

Prepare a budget

Creating a budget is essential to track your expenditures and figure out areas where you often overspend. Ensure to allocate a reasonable part of your income towards discretionary expenses but stay mindful not to surpass it. It can help you stay on track and avoid overspending.

Avoid debt:

Debt can quickly spiral out of control and make it difficult to save money. If you can, avoid using credit cards and other forms of debt.

Avoid lifestyle comparisons

Everyone is unique and so are you and your financial preferences and needs. Comparing yourself with others can result in unfulfilling and unnecessary expenses. Concentrate on what adds value to your life and line up your spendings accordingly.

Save and invest diligently

Open a new bank account solely for your saving purpose and to earn bank interest on saving account while maintaining high liquidity. You may even look for online saving account opening deals offering high saving account interest rates and better benefits and features than their regular counterpart. By doing this, you will preserve your buying power and ensure steady growth of your parked funds over time owing to the power of compounding.

Closing note

Lifestyle inflation or creep is a common pitfall, however, with prudent financial decisions, you can avoid falling prey to it. Always ensure to spend on necessary items and prioritise on saving for your financial life goals. Remember, occasionally you may treat yourself, but never lose sight of your future goals and make conspicuous consumption a frequent affair. Opening a savings account for meeting your life goals is a significant step towards your financial well-being and security. So, plan diligently and save patiently for a fulfilling today and a brighter tomorrow.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.