Lifestyle Inflation – A silent killer of wealth

Lifestyle Inflation? What it is? Many of us just consider the generic inflation of around 5% to 6% to arrive at our target amount for goals. However, if we go deeper to understand the various kind of inflation we face in our life, I found lifestyle inflation is a silent killer for our wealth.

While doing the planning, many of us take the current inflation rate published by RBI on a quarterly basis. However, we forget to understand that how the RBI inflation rate actually replicates our inflation. All of us have different lifestyles, different food habits, and different styles of spending. Hence, judging the inflation rate for our financial calculation based on what RBI publishes is the biggest MYTH.

Lifestyle Inflation – A REAL silent killer

When I say Lifestyle Inflation, again it varies from person to person. Because of current advancements in technology and awareness among people, few lifestyle expenses may be NEED for one and WANT for others. Hence, it again depends on the person to judge. Let me give you two scenarios of my clients with whom I worked recently for Fee-Only Financial Planning Service.

Client 1 – His monthly take-home salary is around Rs.8 lakh. Along with this, he has a rental income of Rs.50,000 a month. So his total income per month is Rs.8.5 lakh. Wonderful right? But the expenses per month are Rs.4.5 lakh. He defends his all expenses are valid and NEEDS but not WANTS. Even though he accumulated around Rs.8 Crore, his retirement goal is still a DREAM than a REALITY. All because of his spending habits.

Client 2 – His monthly take-home is around Rs.1.8 Lakh. His monthly spending is around Rs.30,000. He started investing from the start of his profession to the current age of 49 years. When he approached me for financial planning (after he lost the job due to Covid), I found that he can easily achieve his child’s educational goal and retirement goal. Surprising is that he left with another Rs.1.25 Cr as a surplus.

Both examples are two extremes. Both are right in their spending habits. Both are thinking their way of spending is right. Hence, our spending habits differ from person to person and considering the RBI inflation rate for our financial calculation is the biggest myth.

One more point many of us argue that due to technological advancement, many of our lifestyle expenses are actually reduced. However, look at the way they are adding new features to our mobile phones, TVs or for any household accessories, you noticed that companies are forcing us to spend more than less. All because of the new innovative features they add to the product.

Let me give you few examples like where we were to where we are now when it comes to our spending habits or lifestyle expenses.

1) Cost of watching a movie

2) Car prices

Let me share with you the recent tweet from Anand Mahindra.

It is now unimaginable to think of a car below even Rs.4-5 lakhs. Monthly spending on Diesel or Petrol is nowadays maybe around Rs.5,000 to Rs.10,000 for few.

I know the cost of raw materials may be increased. However, look at the features of the above old car to today’s car you are driving. Due to technological advancement, manufacturers added so many features for our comforts or needs. That forced them to increase the price. That forced us to spend a lot 🙂

3) Cost of Television

Read THIS story about the cost of color TVs in 1982, when the color TVs were first introduced in India. It used to be around Rs.5,000. However, our yearly subscriptions to few channels may be more than this amount.

In fact, few years back, imagining the cost of TVs in the range of lakhs was impossible. Now, it is the reality. Advanced TVs now cost anywhere in the range of Rs.75,000 to Rs.3 lakh.

These are the few examples I thought to share with you. It was unimaginable to think 10 years back that we are forced to spend anywhere around Rs.15,000 to Rs.1 lakh on mobile phones. But it is the reality today.

Lifestyle Inflation – How to beat?

We understood now the impact of Lifestyle Inflation in our day-to-day life. Now, what are the ways to beat this lifestyle inflation?

a) Invest where the probability of returns are more than 8% to 10%

To beat such a hefty inflation rate, the one way is to invest in a product or asset where the probability of returns are higher than the lifestyle inflation rate. When I say lifestyle inflation rate, it may be around 8% to 10%. However, it is risky. Hence, too many may not accept this strategy.

b) Invest more

If you are not willing to take the risk, then the next option to beat such inflation is to invest more and more which may compensate in beating the inflation.

c) Reduce your Lifestyle spending

If both are not feasible for you, then you have to sacrifice in staying away from this mad rush of having the advanced gadgets, appliances or materials in your life. Stick to your basic needs. I know it is also hard for many. Because at the end, majority of our such spendings are not for our satisfaction but to satisfy the society 🙂

Conclusion:- In my view, LIfestyle Inflation and cost of investment are the two biggest silent killers of your wealth. In this post, I discussed Lifestyle Inflation. Let me explain you about the cost of investment in my next post.