Getting to know lifestyle inflation

November 29, 2013

Lifestyle inflation is an ever present problem plaguing our society today. What is it and how do you avoid it? SaveMoney.my explains.

 

By Eugene Chua

I’ve heard of Inflation… but what is lifestyle inflation!?

When a person advances into a more profitable position at work, his or her monthly expenses typically rise correspondingly. This is a phenomenon known as lifestyle inflation.

Just like economic inflation, while healthy in controlled amounts, lifestyle inflation can present a problem when left unchecked, because even though you might still be able to pay your bills, living pay cheque to pay cheque limits your ability to accumulate wealth.

Most of you can probably recall that as a high school student or even in college or university, we managed to live on almost no money at all.

Our only real ‘source of income’ was probably through allowance given by our parents and that probably wasn’t a whole lot!. Still, life was pretty good and while sacrifices had to be made because of limited funds, life went on.

With greater income, comes greater spending ability
Most people will spend more money if they have more money to spend.

Perhaps the first sniff you will ever get of lifestyle inflation is when you find your first part time job.

That extra couple of hundred bucks a month from working at TGI Fridays during summer break opens a whole new world of options in terms of monetary freedom. Suddenly things seem so much more affordable now that you have more cash at your disposal.

Consider a graduate who, just embarking on his career, shares an apartment with some friends for RM500 a month. A couple years later, his salary has increased, so he finds a “better” apartment for RM2,200 a month.

The old apartment was adequate – good condition, great location and well equipped but he reasons that he rather have some privacy and also, the new one is located in a more exclusive area.

Despite the fact that the original living arrangement was fine, he traded up to a more expensive apartment – not necessarily because he needed to, but because he could.

Why it happens
Entitlement
“I bust my butt off to earn my money! I deserve to spend it on the things I want!”

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.

Peer Pressure
It’s not uncommon for people to feel like they have to keep 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 trusty old Saga gets the job done just fine just so you don’t feel “left behind”.

The problem with lifestyle inflation is that you get used to the things you have.  So, as you get more things, you get used to those things too, and having more things becomes your new “normal”.

Numerous studies have shown that people settle into the same level of happiness after the initial excitement of buying new things wears off, so no matter how many things you have (provided you have what you need), you always settle into the same level of happiness eventually.

Am I suffering from lifestyle inflation?
Some possible signs that you may be suffering from lifestyle inflation:
1. You always have a balance on your credit card.
2. You live pay cheque to pay cheque
3. You feel the need to get the latest device or consumer product when the item it replaces is still working perfectly
4. You take on debt to buy consumer products
5. You associate spending with happiness, but normally don’t feel any lasting happiness after a purchase

Managing lifestyle inflation
While some level of lifestyle inflation may be unavoidable, remember that every spending decision you make today affects your financial situation tomorrow.

Here are some tips on how to manage it:

Be conscious of of it’s presence

Keep a budget, watch for examples of where your regular spending has gone up and review it before deciding whether it should be changed.

Splurge with enjoyable activities, not things

Reward yourself by doing activities such as playing a video game, taking a walk in the park or reading a book rather than choosing to buy something new.

Buy an affordable house. For most people their largest monthly expense is housing. Affordable does not mean what the bank will let you borrow! By simply buying the biggest house possible, you’re also inflating many other things.

Be realistic about cars Probably the second largest monthly expense for many. Know that a new luxury car means more than just higher monthly payments. It means more expensive insurance, maintenance costs, repairs and may even required premium-grade fuel. The cost of RON97 (RM2.85/L) is substantially more than RON95 (RM2.10/L).

Eugene Chua is the Finance Editor of SaveMoney.my, an online consumer advice portal which aims to help Malaysians save money through smart (and most of the time, painless) savings in their daily banking, technology and lifestyle spending habits.