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Are you a Victim of Lifestyle Inflation?
Apple Watches And The Economy - We Are Spending More Now
The Apple Watch has just been released, and it is believed that 2.8 million people bought it since its April launch.
Despite receiving lukewarm interest in Singapore, there are telltale signs that Singaporeans are showing increased confidence in the economy, as well as their job security.
The economy is finally back in shape. People's incomes are inching up. Singaporeans are taking on more credit card debt.
For many, the great recession is quickly becoming a distant memory.
Should we view this as a relief that we are putting the past behind us, or is it a worrying sign of irrational exuberance, a sign of lifestyle inflation?
How Do You Spend Your Pay Raise?
You just got a pay raise! You...
Did Your Spending Increase?
Lifestyle Inflation is easy to calculate, in a numerical sense. Say, you received a pay raise of 10%. How much does your discretionary spending (i.e. wants, splurges, gadgets, nonessential items) increase?
- If your discretionary spending increases by less than 10%, congratulations, you have avoided lifestyle inflation. Keep it up!
- If your discretionary spending increases by more than 10%, you are said to be facing lifestyle inflation.
Lifestyle Inflation Explained
If all the mathematical jargon is making your head dizzy, the following sentence best describes lifestyle inflation:
Lifestyle inflation occurs when your spending increases faster than your increase in income (in terms of percentage).
The Singapore Dream
Here are the goals and aspirations of Mr Tan, a young Singaporean professional:
- Travelling overseas in his 20s
- Getting a degree
- Indulging in fine dining
- Buying stylish and classy clothes
- A posh wedding
- A modest and decent car
- Work-life balance
- A fulfilling career
- Raising a dual-income-single-kid family
- Buying 4-room BTO flat at a minimum.
Keeping up with the Joneses
Have the same goals? Most of us are in fact Mr Tan!
These is the typical bucket list of a young aspiring Singaporean. The things we pursue nowadays have long evolved from the ubiquitous 5Cs that the older generation of Singaporeans dream of. Is this lifestyle inflation in action?
"Keeping up with the Joneses" is a common phenomenon whereby we compare, or "benchmark" ourselves to others to determine whether we belong to a particular social class.
You can deny it, but most of us are guilty of using the list above (or a similar "mental checklist") to judge others.These are the "list of criteria" that we use to compare ourselves to others; to see whether we are better off or worse than others.
To make ourselves feel better, we try very hard to mimic what the "middle class" is doing. People who are not doing so are seen as being inferior. This can be present in many situations, like how we indulge so much in fine dining!
Why is Lifestyle Inflation Bad?
Mr Tan earns $2000 per month. After paying for all his necessities, he is left with $1000 to splurge on his wants.
Like most Singaporeans, Mr Tan is a diligent worker, and is rewarded with an annual pay raise of 10%.
However, Mr Tan has a weakness: he easily succumbs to the lure of increasing his quality of living.
He believes that his income will increase forever. His overconfidence led him to increase his discretionary spending by 20% every year.
Now, let's look at how much income and spending changes over the next few years.
Lifestyle Inflation Is A Hidden Poison. Look At How Spending Increases Like A Rocket!
Income (Increases 10% p.a.)
Spending (Increases 20% p.a.)
Will You Be Like Mr Tan?
Here are a few insights:
- By Year 7, it should be a wake up call to stop spending unsustainably. Sadly, there are people who believe that it is not their fault. Instead, some even resort to the worst financial poison of all: take on credit card debt. (Our capitalist economy has invented the great tool of debt and credit to allow people to pay for their current lifestyles with their future income. This is the worst outcome that I fear for people who do not even realize they're victims of lifestyle inflation.)
- If left unchecked, lifestyle inflation will really pull people down an endless spiral that leads to the destruction of lives. Even if you are a diligent worker, perform well and are well-liked by your superiors and peers, your increasing income and your good character cannot save you from your tendency to succumb to lifestyle inflation.
- Lifestyle inflation is a hidden destroyer of wealth. The first few years are the quiet years. You might not even realize that you are embarking on an unsustainable budget. Your family and friends might even mistake your increased spending as a sign of your successful career, and even encourage you to reward yourself for all the hard work you have put in. No one can spot your lifestyle inflation; only you can save yourself.
- Compounding is powerful. Spending started out as only half of income, but it eventually catches up very quickly to 3 times its initial level after 7 years. Compounding is a very powerful tool; you should use it to compound good things, not bad things! (As a sidenote, a life advice: remember to constantly be on the lookout for negative influences/signs in your life. Bad habits, people and influence also have tendencies to compound. Eliminate them all and keep them in check before those issues go out of control!)
Why do People Succumb to Lifestyle Inflation?
The most common reason is due to the desire to keep up with the Joneses.
Many people do not want to be seen as being stagnant, even though they will perfectly do fine by maintaining the same standard of living for the next few years.
Secondly, as we age, our priorities tend to change. As a 20 year old male, I am now content with having just a computer for me to indulge in video games, and probably a small allowance to cover my transportation and living expenses.
Who knows that when I reach my late 20s, I might be desiring to get a car? It can be either for egoistic reasons or legitimate utilitarian benefits like convenience and time-saving.
This situation is not rare. More often than not, people unexpectedly commit to larger and larger purchases they did not plan for, due to changes in priorities as we grow older.
We might be content with what we have now, but situations may change in the future that leads us to add on unplanned and unexpected additional expenses.
How to Avoid Lifestyle Inflation
- Plan early. Financial planning might not be the top priority in young Singaporeans' minds, but it definitely helps you anticipate what future expenses you might incur.
For instance, if you believe that you might need to get a car for work purposes, Start allocating a fixed amount to a "cookie jar" for your car's downpayment.
- If you know that you easily succumb to peer pressure, look to ways to tackle the issue to avoid negative peer pressure.
Realize that your happiness does not depend on others' opinions of you.
- Know the math. When you anticipate an increase in income, start thinking how you would want to allocate the additional money every month.
Rule of thumb would be to save a fixed portion first, then spend whatever is leftover. Think of the additional income as a right to save more for your future, not as a right to spend more.
- Hang out with friends who are good with managing their money. This might be a quirky life hack, but it is really beneficial (for both parties!) when both parties constantly remind each other not to spend beyond your means.
Sometimes, I view my friends as an insurance who will keep a lookout for me in the event I succumb to splurging beyond my means. (I believe some of my friends do too!)
Managing Lifestyle Inflation is a Life Skill
Congratulations, you have understood a concept that will lead to a more disciplined approach to managing your money!
Lifestyle inflation is not a daunting concept. In simple words it is just about spending below your means.
Managing Lifestyle Inflation is an Essential Part of Wealth Building
Actually, wealth is easy to build up, as long as a disciplined approach is adopted. Most of the failures in wealth building is due to the person's unawareness of their emotional impulses and shortcomings.
Even if wealth building is not a priority for you, I still believe that managing lifestyle inflation is an essential life skill. It is actually a similar concept to taking care of your own house, managing your relationships etc. Start today and take control of your impulses!
Being able to resist impulses to spend more than you can afford will lead to greater self-awareness, self-control and increased happiness.
Wait, Managing Lifestyle Inflation Doesn't Mean You Cannot Enjoy Life!
Don't spend too much, he said. Save all of your additional income, he said. You might be mistaken that the only way to counter lifestyle inflation is to lead a miserable life. That is not my intention!
What I advocate is to appeal to people to be more aware of their choices and their consequences. People need to know that lifestyle inflation is real. It might initially look benign, but due to the mathematical power of compounding and the inertia of humans, it will eventually come knocking on you at times you do not expect.
As long as you know the importance of not letting your spending grow faster than your growth in income, you will do fine. Go ahead and enjoy life, but splurge responsibly. For most things in life, we ultimately only have 2 choices: enjoy now, suffer later (instant gratification), or suffer now, enjoy later (delayed gratification, a.k.a grit).
With all said, we can keep telling ourselves that we are content with what we have now, however, being humans, we will eventually challenge the status quo and constantly seek improvements and changes in our lifestyles.
Inflation, if managed properly will lead to a sustainable increase in our standard of living. Don't think that inflation is always bad! Celebrate the time when you buy a new house or a new car! After all, you worked hard for it; penny by penny.
We cannot control the economy's inflation, but we can control our own lifestyle inflation!