No savings despite increased income? You are suffering from lifestyle inflation!

Pic courtesy: Pixabay

With a near 60% of hike in salary and promotion, 26-year-old Sabrina was feeling elated and soon started upgrading her lifestyle - from buying a new phone to "upgrading" her closet and planning out that dream holiday. But unknown to her, she was heading towards lifestyle inflation! Wait, what? We have heard of inflation, but what’s Lifestyle Inflation? Have a look!

What is lifestyle inflation?

Lifestyle inflation or lifestyle creep is basically a phenomenon in which your spending increases whenever your income rises. Your lifestyle reflects this as you get a raise or move up in the corporate ladder or life. You tend to spend more on yourself, and feel like you deserve the better things in life because you’ve earned it! Yes, you work hard and you deserve an upgraded lifestyle in general. But if you expenses keep going up, it makes it difficult to save and invest and you can get stuck in the living hand-to-mouth/pay cheque to pay cheque situation, finance influencers Sayali and Niyati explain.

Why leads to lifestyle inflation?

It’s more psychological than anything else. For most people, you get a good education, work hard, manoeuvre office politics, struggle to start life off at low salaries, and when you can't afford that luxury, you tell yourself that whenever I make more money, I will splurge! Well, that can be a vicious cycle, because when you do get that raise, you tend to think you deserve spending all of it, and in turn deprive your future self of wealth that you could have created, Sayali and Niyati highlighted.

How to know your inflation rate?

We get a holistic CPI (Consumer Price Index) that tells you India’s inflation rate, but that may or may not reflect your personal inflation rate, Sayali and Niyati underscore. Now we say this because not everyone spends on the same things! And different things face different rates of inflation. So you have to figure out how much you are spending on which category like rent, groceries, daily travel, eating out, holiday travelling, etc. See what percentage you are spending on each category, see the inflation in that category, and take out a weighted average to gauge how much your personal inflation rate is Sayali and Niyati share.

Managing your finances amid lifestyle inflation

It doesn’t matter how much or how little you are making, start budgeting in terms of a percentage for saving and investing today! According to Sayali and Niyati, set aside at least 20-30% of your income towards your future financial goals. Once you get into the habit of setting aside 20-30%, every time you get a raise automatically you will end up saving more too!

But does that mean we stop having "fun"?

Absolutely not! We talk about the importance of saving and investing, but we NEVER compromise on having fun and enjoying life in the present! Because a wise movie once said, zindagi na milegi dobaara! So yes, it’s very important to have a "fun budget", but make sure you save and invest for the future because in case you end up living a long life, we don’t want you struggling in your retirement age, Sayali and Niyati underlined.

Tips to manage your finance

Sayali and Niyati point out four major tips to balance the finances:

1. Make sure you start saving and investing a percentage of your income from day 1!

2. Track your spending and make sure you stick to a strict budget - comes in most handy when you are on a lower income at the start of your career

3. Read up about what is happening in the market and world! Keep up with what is getting expensive so you can be prepared for it

4. Set your financial goals and invest for them accordingly!

Where to invest in your 20's

In your 20s you have your whole life ahead of you, so, Sayali and Niyati believe the best thing for young people to do is start SIPs in equity mutual funds! Start with an index fund and then learn more about the other options out there for long-term investing. Slowly educate yourself on the different investment options out there and create a well-diversified portfolio and you will be sorted!