{"id":12039,"date":"2020-10-16T07:41:18","date_gmt":"2020-10-16T07:41:18","guid":{"rendered":"\/blog\/?p=12039"},"modified":"2020-10-16T07:42:03","modified_gmt":"2020-10-16T07:42:03","slug":"does-your-financial-plan-account-for-lifestyle-inflation","status":"publish","type":"post","link":"https:\/\/tata-blog.osian.dev\/blog\/wealth-services\/does-your-financial-plan-account-for-lifestyle-inflation\/","title":{"rendered":"Does your financial plan account for lifestyle inflation?"},"content":{"rendered":"\n

Introduction<\/strong><\/h2>\n\n\n\n

When\none is a student or just starting off your career at the lower rungs of the\ncorporate ladder, one tends to restrict expenditure. Their financial realities\nforce them to be frugal and measured with their purchases, spending largely on\nonly necessities rather than luxuries. However, as people move up in their\ncareers, receive investment pay-offs or come into inheritances, their\ndisposable incomes increase. This increase in income often prompts them to\nabandon frugality to engage in a high quality of life funded by higher\nexpenses. <\/p>\n\n\n\n

One\nmay wonder why this would be a bad thing. After all, the entire purpose of\ncareer progression is financial freedom. However, while we may like to believe\nthat all expenses are conscious ones that is often not the case.  A sudden increase in fortune can blind people\nto the actual extent of their necessary expenses.  What were once \u2018luxuries\u2019 start to\nincreasingly become \u2018necessities\u2019?   This\nis further catalyzed through societal pressure and marketing that promotes\ninstant gratification, an enabling digital purchase environment, and social\nmedia. <\/p>\n\n\n\n

This\nphenomenon is termed as Lifestyle inflation and essentially refers to the\ntendency for a rise in income to be followed by a disproportionate increase in\ndiscretionary expenditure above and beyond necessity. It can be a hindrance to\nyour long-term wealth creation.<\/p>\n\n\n\n

Because\nof how subtle it can be, lifestyle inflation can seriously compromise financial\nplanning if left unchecked.  This is the\nreason many people end up living pay-check to paycheck despite making enough\nmoney to comfortably meet their needs. Giving in to lifestyle inflation also\nhas serious impacts on retirement savings and financial resilience in case of\nemergencies. People are quick to lose track of long-term priorities for\nshort-terms experiences and can end up damaging their financial health. Thus,\nit is necessary to not only account for any lifestyle inflation you may experience\nbut also actively work to factor the same into your financial planning to\nmitigate its adverse effects. <\/p>\n\n\n\n

Additional Read:<\/strong> The SMART approach to your\nfirst financial plan<\/a><\/p>\n\n\n\n

Easy ways to account for lifestyle inflation:<\/strong><\/h2>\n\n\n\n

1. Be aware<\/h3>\n\n\n\n

This is a simple one, and doesn\u2019t need too\nmuch explanation. Knowledge is power. If you\u2019re aware of the same, and see it\ncreeping up on you, you\u2019ll be able to measure it and act against it. Too many\npeople are unable to admit that they are experiencing lifestyle inflation and\nnever make an attempt to fix it. <\/p>\n\n\n\n

2. Make sure to budget<\/h3>\n\n\n\n

Budgeting is a crucial aspect of financial\nplanning. It helps demarcate needs and luxuries and allows you to effectively\nplan all your expenses. It also helps to make sure you divert some of your\nincome towards savings and investments. In case there are specific luxury\nexpenses you want to make, such as buying new clothes, or maybe a video-game,\nor taking a holiday. Make sure to budget them in advance so that you retain\ncontrol of your finances and avoid the trap of instant gratification. <\/p>\n\n\n\n

3. Have strong reasons for expenses<\/strong><\/h3>\n\n\n\n

Naturally, there are some large expenses\nthat need to be made such as moving to a new house, or getting a new car in\ncase the old one has become obsolete. However, even in such cases, always seek\nto provide clear reasons for each expenditure. Developing this habit will help\nyou negate the impacts of lifestyle inflation as your expenses will always\nremain conscious ones. You will be more likely to create strong budgets and\nstick to them, regardless of an increase in your income. <\/p>\n\n\n\n

4. Automate savings and investments<\/h3>\n\n\n\n

Automating your monthly contributions to\nyour savings account and your investments can help to maintain control over\nyour budget. Even if you see an increase in income and feel the temptation to\nengage in celebratory expenses, you can channel the extra income towards your\nretirement and emergency corpus. <\/p>\n\n\n\n

Funneling your funds into a SIP Mutual Fund,\nwhich automatically deducts the investment amount from your account every\nmonth, can be a great way to start the same. Should you see an increase in\nincome, you can increase your contribution amount and avoid the temptation to\nspend the extra income on frivolous purchases. <\/p>\n\n\n\n

Additional Read: <\/strong>Why are SIPs an Ideal Choice\nfor the First-time Investor?<\/a><\/p>\n\n\n\n

\"Easy<\/figure>\n\n\n\n

5. Resist the temptation to finance lifestyle through debt.<\/h3>\n\n\n\n

An increase in income may lead some to\nerroneously believe that they can \u2018afford\u2019 to take on new debt. However, debt\nshould never be a first resort, particularly if being used to finance new\nlifestyle expenses such as consumer durables or holidays. These loans often\nhave a high interest rate and result in long-and fairly large EMIs that act as\na regular drain on your finances, limiting your ability to save and invest. <\/p>\n\n\n\n

6. Know who you are and what you need.<\/strong><\/h3>\n\n\n\n

It\u2019s easy to give into societal pressure and\nmake expenses that you don\u2019t need to \u2018climb\u2019 the social ladder. However, it\u2019s\nimportant to know that material possessions offer only so much long-term\nvalue.  If one has to spend, one should\nspend on experiences and knowledge as well as on activities that you can do\nwith your family and friends.<\/p>\n\n\n\n

Conclusion<\/strong><\/h2>\n\n\n\n

Aspirations are important, however, one should know which aspirations are good and which are bad. Lifestyle inflation occurs when one\u2019s aspirations are built on flawed foundations and do not scale appropriately alongside one\u2019s income and long-term financial requirements. It is alright to gradually increase one\u2019s quality of life instead of making leaps and jumps with each increase in income. It is important to increase your contribution to your savings and investment funds proportionately with every increase in income. <\/p>\n\n\n\n

If you\u2019re seeking help to combat lifestyle inflation or are looking for guidance on growing and managing your personal wealth, Tata Capital Wealth Management Solutions<\/a> has just what you need. Its team of expert and dedicated wealth managers will help you find the right investment strategy with a wide array of products, helping you grow your wealth and increase your quality of life in a sustainable manner. <\/p>\n","protected":false},"excerpt":{"rendered":"

When one is a student or just starting off your career at the lower rungs of the corporate ladder, one tends to restrict expenditure. <\/p>\n

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