Lifestyle Inflation

What is lifestyle inflation

Lifestyle inflation occurs when a person’s income increases, resulting in increased spending

People are prone to spend money when they have it. They become excited about greater income and feel the pressure to take out several loans to live a better lifestyle. Only until they find themselves in a deep debt hole. As a result, they are unable to meet their monthly obligations and are unable to save for emergencies.

Take the example of a new graduate who just got a job. As a student in Johannesburg’s CBD, he has been renting a decent bachelor’s apartment for R3500. Since Johannesburg’s northern suburbs are fancy, he decides to move there.

Keep in mind that the old apartment was decent and had the same size as the newly rented one. However, the new apartment was chosen solely because of its location in a prestigious neighbourhood.

What drives people to lifestyle inflation?

In many cases, people who suffer from lifestyle inflation believe they are entitled to everything they wish to spend that money on. However, they overlook the prospect that increased income will allow them to save more money. Lifestyle inflation can begin as simple as stopping eating at the same restaurant where you used to have meals. Because you now prefer a more expensive taste of food that corresponds to your current standard.

Keeping up with the Joneses

It may seem strange that people feel under immense pressure to follow the social networking standards they have created in the world we live in.

Keeping up with the Joneses means “not falling behind your neighbour in terms of material things and, to do so, buying whatever your neighbour has and doing what they do.”

The danger with this approach is that you do not know your neighbour’s financial standing. Even if you may live in the same neighbourhood or drive the same car the fact is that people’s finance will always differ, because you could be using your only salary income to finance your lifestyle whereas the other person has multiple streams of income to maintain their lifestyle

KEY TAKEAWAYS

  • A budget is a must to avoid Lifestyle inflation
  • Living your life according to your means is more important than keeping up with the Joneses. Your finances are your own responsibility.
  • Your finances are your own responsibility.

Access to Substantial Credit

Often time people associate substantial credit access as an indicator of wealth , or as a guarantee of affordability when borrowing money or buying with a credit card. In fact, this is not true , since they are hit with reality when it comes time to pay back, and when their monthly obligations eat up more than 30% of their income. Making it almost impossible to keep up with their monthly obligations, even to save for emergencies.

How can you save yourself from Lifestyle inflation?

It is , however , inevitable that lifestyle inflation may occur in other cases , such as moving to a new area for security reasons or hiring a household helper if you work overtime or travel frequently.

⭐ Tip: Making a financial plan and a budget before making any purchases is recommended regardless of your income.

Here are some of the Lifestyle inflation traps to avoid

  • Avoid jumping into long term commitments like buying a car or leasing new costly apartments that you did not save for prior.
  • Celebrate your income increase or promotion with easy things like going on a mini-vacation, going to your favourite restaurant buy yourself something that you can afford.
  • Don’t get excited and open clothing accounts and take credit cards unnecessarily
  • Do not spend impulsively without a budget in place
  • Use the extra income earned from your salary increase to invest , save for future purchases, and save for emergencies.
  • Identify your wants and needs and learn to budget before your wants

Fast Fact: Qualifying for credit does not mean you can afford it