Before planning to invest in any of goals people always check inflation and its impact on the returns on their investments. For example, Rs 100 lying in your home today won’t be equivalent to Rs 100 at the end of a year, and could be say Rs 94 post inflation at the rate of 6%. It means you cannot buy the same thing with Rs 100 at that point of time what you can buy today with the same Rs 100. This is called simple inflation, but what about your lifestyle-related inflation? Have you ever thought that while doing your financial planning? Let’s understand:

What is lifestyle inflation?

What will you do when you get more money than you spend? Say you get a promotion at work or a great return on your investment or won a lottery. Any increase in your income will invite celebration and it has been seen that most of the time people will end up increasing their spending way beyond, and lifestyle inflation is very difficult to curb. Lifestyle inflation has adverse effect on many; in the past, we have seen many lottery winners and celebrities who hit the jackpot but couldn’t sustain it.

This temptation is very difficult to avoid and makes one forget about their long-term goals, you need to be mindful about how you spend. Let’s see some of the ways you can avoid this:

1. Identify your wants and needs:

With the modern-age lifestyle and the things needed for living a normal life are going for a drastic change such as the usage of mobile phones, cars or many other electronic gadgets. These used to be luxury items a few years back, but have become a necessity nowadays, so the key is to identify between your need and want and clearly avoid falling into the trap.

2. Savings should be a priority and avoid debt:

Start saving every penny you can, is the first step towards a healthy and secured financial life. With the rise in income your savings should also grow. This will provide adequate safety in the financial breakdown and also saves your from excess needless spending. Don’t get into avoidable debt such as loans for car, TV or luxury items.

3. Future planning:

If you get a raise today, what would you do with the additional money? As seen above, try saving some part of it than splurging the entire money. Though some upgradation in life is always needed as a reward for your hard work like shifting to a better apartment or purchase a new car, but the same should be done within a limit and not with too much loans.

4. Prioritise your loans and liabilities:

You should always keep an eye on your existing loans and liabilities and constantly seek ways to pay off the debt as allowing debt to sit forever will keep the interest meter on. So the moment you get extra funds, you should plan to pay off a debt which is high on interest and thereby you can always splurge a little and enjoy.

5. Live within your means:

A rise in revenue does not alter the fact that living below your means is the single most vital step in financial freedom. If your expenses exceed your income it doesn’t matter how much you earn. Because, you are living beyond your capacity and ultimately taking a toll on your personal finances.

In many situations you may be able to spend extra money on certain things but you should not. Rather, you should search ways to earn extra money or ignore the expensive luxuries if not needed.

Conclusion: There is no harm in having desire of a better living life, but before you make your next big purchase with your additional income, take a look at your goals, both short term and long term. The goals in the next five, 10 or 15 years. Do you need to change anything or increase your investment to achieve those goals? You need to re-evaluate your financial goals and keep into consideration that good time will not last forever and you have to plan for contingencies. Though an increase in income or a salary raise looks great it can really make a big dent in your future financial bucket. Remember that lifestyle inflation will hit your savings more than twice the speed of your regular inflation, so beware about your lifestyle inflation.

MAKING RIGHT CHOICE

  • Before you make your next big purchase with your additional income, take a look at your goals both short term and long term
  • You need to re-evaluate your financial goals and keep into consideration that good time will not last forever and you have to plan for contingencies

The writer is a chartered accountant and chief gardener of Money Plant Consultancy

Source: http://www.dnaindia.com/personal-finance/report-balance-your-financial-life-and-lifestyle-inflation-2569543