Posted in Finance, Accounting and Economics Terms, Total Reads: 288
Definition: Lifestyle Inflation
Lifestyle inflation is a phenomenon which occurs when there is an increase in spending when there is an increase in income. Everytime a person gets a raise, the spend increases, the person tries to add more expenses some necessary as per the lifestyle, some unnecessary. Due lifestyle inflation, the savings do not increase even with increase in income as the expenses also increase everytime. In such scenarios, the overall financial situation of the person does not change e.g. if he had debt, the debt remains as the rise is now used for expenses rather than debt clearance.
When person joins a new job, the pay would be less, let us say 1000$. Now he tries to adjust in 1000$. Eats at home, takes a train/bus for office. Also tries to minimise unrequired luxuries like AC cab etc rather he sticks to regular public bus. In case of emergencies may be he uses a cab. Now let us say he saves 500$.
Now after some time at job with good performance, he is promoted and the salary becomes 2000$. Now the savings should be 1500$. But as per lifestyle inflation, the person starts to eat out more often because he can. He starts taking cab back home or may be even buys a car with a loan. Starts a posh gym near his house. Now the savings may come down to 400 or 500$.
Even after gaining 1000$ per month extra as per previous situation the savings did not increase but the expenses increased from 500$ to 1500$. This means that the spending increased as per increase in income.
Now to avoid this person should concentrate on savings. The main focus should be on savings. If income increases, savings should increase.