Wednesday, December 11

Lifestyle inflation: The silent killer

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“Able to spend your life in your own way is lifestyle”

“I seem to earn more, but I still can’t save money.” – Is this phrase familiar to you? Well, I am sure we have said this sometime in our lives and the answer to this is…Lifestyle inflation!

Lifestyle inflation refers to how your spending increases when your income grows. In a simple term or conceptual understanding, I will say lifestyle inflation means “more money, same problem”.

According to behavioural finance, we have never-ending wants. In economics, human’s wants are the important fundamental. Once a goal is reached, hunger for the next goal begins. Naturally, we have a desiring want for more.

I learned the word inflation in school by formal education but lifestyle inflation by experience. No school taught me the meaning of lifestyle inflation. I grew up in a lower middle-class family, where owning luxury and branded products is only a dream.

Since young, this inferior has evolved and developed into the eagerness to earn more money, buy a luxury car, own branded clothes, go on overseas holidays and other expensive lifestyle consumption. Basically, the ability to do all these became my priority. My philosophy became “Life needs a style” and without realising, I fell into the trap of lifestyle inflation.

This has been a culture I developed; earn more, spend more. In some point of my life, even a five-figure income was not sufficient to accommodate my lifestyle, which led to “more money, same problem.”

Income is not the only measurement for financial success, it is only one side of the mathematical equation. Expenses are equally important as well. Often, we focus more on how to increase our income but ignore the expenses. Luckily by reading behavioural finance books and listening to successful people, I slowly realised my weaknesses and I start reflecting on the impact of lifestyle inflation.

Lifestyle inflation is like cancer in our daily life. It’s the silent killer to our wealth, which happens gradually over an extended period of time, making it hard for us to notice. Many of my clients have a high lifestyle.

You only realise that you are going through a lifestyle inflation when you are in a difficult financial situation, your business slows down, you go through retrenchment which leads to income reduction.

Normally, it will be very difficult to lower your lifestyle when you are facing income reductions. Being mentally and emotionally prepared to handle this situation is very crucial here.

When I was at the top of my lifestyle and I faced an income slow down, I was driving a continental car, which cost me more than RM40,000 annually. I had to decide quick, hence I sold my car immediately and moved to a national car. How many of us are ready to do this?

The car we drive, the place we live in, the education entity of our children, the place we have our coffee, the brand of our clothing, the countries we travel to for a holiday; all these are partially our identity or image which we have built throughout the years.

It’s not an easy task for us to lower our lifestyle and settle for something lesser than before. This change involves our ego, dignity and the perceptions that the society might have on us. However, we need to look beyond all these in order to ensure our security and sustainability. Let’s see on how we can avoid falling into the lifestyle inflation trap:

Life is good if you are happy, stop trying to keep up with others

Wanting to keep up with others is probably the number one factor that leads to lifestyle inflation. When you think about it, there will always be someone who has more than you. If you always keep comparing and want what others have, you will never have enough. You will always want more.

That’s an endless cycle, and it will never lead to happiness, in fact, it will only bring you more misery and a financial downfall. It makes no sense to compete for the best and the newest of everything.

Life is not a competition. It’s a journey. We are all on a journey to find purpose, to achieve something, to learn and to enjoy. This journey has nothing to do with how well other people are doing, or what they have. It has everything to do with what you want to do, and where you want to go. That’s all you need to worry about.

Priceless value for your purchase

I do love cars and it’s true that buying a Porsche may give me some happiness, but the fancy of purchasing one luxury car will slowly fade away and the desire will soon move to a Ferari. I’d rather go on a holiday trip with my daughter or on a getaway with friends for the weekend than have a luxury car.

Small expenditures of money involving social interactions such as dining out, going for a movie, going to a concert, meeting up for drinks, a couple of golf games and badminton are great ways to create lasting memories.

True happiness can only be achieved by understanding our inner feelings, and by prioritising experiences over materialistic things.

Get real about your priorities

Develop your financial priorities, this can lead to your financial well-being. Some questions to ask when developing financial priorities are; what money should do for you? What is important in your life? What is your aspiration?

Questions like these will bring awareness about yourself and what you want to achieve in life. Once you set your priorities right, it will be difficult for you to fall into a lifestyle inflation trap.

Having financial priorities that you’re determined to meet can really help you resist temptations that can cause you a downfall. Perhaps, you could buy a gently used car and start building your retirement fund or your children’s education fund when you have realised that these are your main priorities; a sustainable lifestyle for you at old age and quality education for your children.

This is not to say that you should drive your first small car, never change your phone, and be stingy when it comes to your food; please don’t get me wrong. Money is meant to be spent, you will never feel the value of money if you don’t spend it.

However, think carefully before spending and spend wisely. It’s all about balancing financial strength and present life enjoyment.

Financially successful people are not necessarily the ones who have the highest incomes, the best cars or bungalow.

They are people who are financially free, and not dependent on their active incomes to maintain their lifestyle. So, sit back, reflect and prioritise….you will be lifestyle inflation-free!

Gunaseelan Kannan, a licensed financial advisor by Bank Negara Malaysia and a licensed financial planner by Securities Commission (CMSRL/B4198/2013), is currently pursuing his PhD research on financial planning and financial technology. He also lectures on accounting, finance and business fields. He is the Malaysian Financial Planner of the Year 2018 and 2019 Award winner (1st Runner Up), from Financial Planning Association of Malaysia. He can be reached by email at [email protected]