Lifestyle inflation refers to an increase in spending when an individual's income goes up. It means you keep on updating your lifestyle & increase related expenses whenever there is a rise in income. You become habitual after a certain point in time. If there is a bonus, windfall, or unexpected income, all goes towards luxury spending, and nothing is left for savings eventually. It becomes difficult to get out of debt, save for retirement, or meet other financial goals.
Lifestyle makes you feel good right now, however, if you are not saving & thereafter investing enough for your future goals, it may drain you out completely. And this you will come to know only after a decade or two already been passed and nothing can be done now. We have seen lot many examples of big tycoons, industrialists, celebrities & affluent personalities who went to the extent of bankruptcy even, from their luxurious life they had one point in time.
Life is always a mix of ups & downs like a roller coaster and so is our cashflow. Therefore, to safeguard future expenses, it is always advisable to have multiple sources of passive income.
Many people underestimate the compounding effect of inflation and how purchasing power can be reduced over a period of time. If we take general inflation 7%-8% p.a. then lifestyle inflation could be 5%-8% p.a. further.
For example, at the start of the career at your young age, you might be riding with a bike and now upgraded to a sedan car or SUV after marriage.
2010 2020
Vehicle owned Bike SUV
Vehicle Cost 60,000 10 lacs
EMI (5 years) 1,300 21,000
Petol / liter 35 90
Average (km/liter) 60 15
As you have upgraded your vehicle, your EMI increased drastically, the average of the vehicle come down and not only that cost of petrol also increased over a period of time.
This is lifestyle inflation... very very common for young generation w.r.t. a bigger house, bigger car, foreign trip, luxury mobile, costly household purchases, hotel, food & amusement cost, children marriage, etc.
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