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Monday, May 19, 2014

Manage Lifestyle Inflation

The other day while I was talking with my brother, I realized that in life, most of the time, it has to do with Lifestyle Inflation, and not inflation alone that cause the struggle for Malaysians to live in our time today.

How many of you remembered how you spent when you were still in your university days? As I studied in local university, I have the option of staying in the university residential for an amount of RM300 (inclusive of food, broadband and utility). We would still go for movie, Starbucks and also entertainment, but most of the time, we would take the public transport. (save on parking).

After graduation, some of us would opt for RM300 a month room rental...I remembered some of my friends would even shared a room but fast forward a few years, we would take room that cost us RM700. The old apartment might be in good condition, great location, nice neighbours and a lot of good food....but the new ones are in exclusive is not because there is a is because one could afford it.


If you have never asked this question, you should do so by now. 

People have a tendency to spend more when they earn more...especially in our world today, where marketing rules. It’s not uncommon for people to feel pressured in keeping up with their friends’ and business associates’ buying habits. If everyone drives a BMW to the office, for example, you might feel compelled or pressured to buy one as well, even if your old Honda Accord gets the job done just fine. The same goes for your house....but lifestyle inflation goes beyond just your car and accommodation and that is the scary part. Most people end up spending more for vacations, dining out, entertainment, boats, private school tuition and wardrobes, just to keep up with peer pressure.

It is important to know that a lot of people serve a lot of debt over a period of decades. Just because they look rich doesn't mean they are rich.

Another contributing factor to lifestyle inflation is entitlement. You’ve worked hard for your money so you feel justified in splurging and treating yourself to better things. While this is not always a bad thing, rewarding yourself too much for your hard work can be detrimental to your financial health now and in the future.


Even though lifestyle inflation might not be good, sometimes, spending more makes sense. 

For example, the upgrade on wardrobe could be important in order for one to dress properly for work following a recent promotion. Or if there is an additional member to the family, a new born baby, there might be a need to move into a new house with an additional room so that the grown ups could have proper sleep. A certain amount of lifestyle inflation is to be expected as your work and family obligations evolve. Spending a little extra to improve your quality of life might also make sense – as long as you can afford it.


Lifestyle Inflation

While some level of lifestyle inflation is unavoidable, sometimes, it might be possible. It is important to ensure that every spending you make today affects your financial tomorrow. 

Even with a substantial pay increase, it’s possible (and quite easy) to end up living paycheck to paycheck, just like you did when you were making much less money. That’s because the increased spending that results from lifestyle inflation can quickly become a habit: the more you earn, the more you burn. You buy more things than you need just to maintain your new (inflated) standard of living.

Assume you splurged and bought that $800 pair of Jimmy Choos when you were 25 years old. Imagine you had invested that $800 instead. When you reach age 65, your $800 would be worth $5,632, assuming no additional investment and a 5% interest rate return. Even though the shoes are awesome, would you rather have great shoes for a couple years or almost $6,000 extra entering retirement? While some purchases are necessary, it always pays to separate needs (things we have to have for survival, including shoes) from wants (things we would like to have but don’t need to survive, like the Jimmy Choos). Keeping needs and wants in mind – and making realistic, honest assessments about whether a potential purchase is a need or a want – can help you make better financial decisions and avoid excessive lifestyle inflation.

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