How can millennials combat lifestyle inflation? – Economic Times
By Rahul Jain
When 32-year-old Akash, working with a reputed IT company in Pune, got a promotion followed by a substantial salary hike, his lifestyle underwent a major change. From eating out once a month to twice a week to driving to office every day, Akash even opted for a high-value credit card. He is a classic example of someone falling prey to lifestyle inflation.
So, what exactly is lifestyle inflation? It refers to a hike in expenses following an increase in income, and the side effects of this inflation are many. It not only hampers long-term wealth creation, it also leads to discretionary expenses, which can strain your finances and be a major roadblock in achieving financial independence.
Millennials, who form a 47 percent share in the working-age population, are most vulnerable to this kind of inflation as they believe in instant gratification.
Read on to know how they can combat this silent wealth diminisher.
1. Stick to a budget
A productive way to counter lifestyle inflation is to stick to a pre-defined budget. While a hike in income calls for a celebration, it shouldn’t be at the cost of modifying your lifestyle, putting major goals at risk. It’s therefore essential to formulate a budget and stick to it to the T.
Budgeting goes a long way in ensuring you spend on your needs, meet all liabilities and don’t bite more than what you can chew. In a tech-driven world, there are many apps which can help you budget efficiently. Using them can help you weed out unnecessary expenses, thereby keeping lifestyle inflation at bay.
2. Automate investments resulting in forced savings
One of the easy ways to save money, compound it and battle lifestyle inflation is to automate it. Many financial instruments, such as mutual funds give you the option to automate your investments, resulting in forced savings.
A systematic investment plan (SIP) in mutual funds is a good way to get started. Through SIP, a fixed amount is deducted from your account every month and gets invested, resulting in forced savings. It’s advisable to hike your investment by a certain percentage to accumulate a higher corpus.
For instance, a monthly SIP of Rs 5,000 in an equity mutual fund offering 12 percent annualised returns for a period of 10 years can help you amass a corpus of over Rs 11 lakh. However, if you step-up the SIP amount by 10 percent annually, the end corpus will be above Rs 16 lakh.
3. Avoid lifestyle-related borrowings
Availing loans to meet various lifestyle-related needs is easy these days, thanks to fintech. All you need to do is to sign up on the portal of lenders, complete KYC norms, fill-up the loan application form and within minutes the amount is credited into your account. Justifying such borrowings with increased income is not uncommon.
However, these borrowings often come with a high rate of interest, resulting in high EMIs that can significantly strain your finances. In the event of missing a single EMI, your credit score can take a major hit. Also, frequent borrowings paint you as a credit hungry borrower, which can be a roadblock in availing big-ticket loans in the future for needs such as buying a house, higher education of children, etc.
4. Be aware of your needs
Mimicking others and peer pressure have a lot to do with lifestyle inflation. Increased income is seen as an opportunity to live life like the affluent. The same can have a disastrous effect on wealth creation in the long run.
Thus, it’s important to be aware of your needs and make sure you spend only to fulfil them. Giving in to pressure to replicate someone else’s lifestyle can bite you hard. It often leads to costs, the collective impact of which is massive. Therefore, it’s essential to be absolutely sure about your needs and spend accordingly.
The final word
Combating lifestyle inflation to gain financial security is all about curbing the need for instant gratification and understanding how the increased funds can be better channelised for growth for the long haul.
At the same time, it is vital to be in absolute command of your needs and not give in to the pressure of mimicking your peers and bring a major change in your standard of living. Through fiscal discipline and prudent choices, you can overcome lifestyle inflation and build a sizeable corpus for crucial goals.
(The author is Head, Personal Wealth Advisory, Edelweiss.)
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