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Financial Education

Beware of lifestyle inflation!

PUBLISHED: Mon, 01 Mar 2021 11:39:49 GMT

This article is part of an ongoing series of basic financial education brought to you by financial industry professionals curated by PocketFin – The Financial School of Real LifeCNBC Africa provides content from PocketFin as a service to its readers but does not edit the articles it publishes. CNBC Africa is not responsible for the content provided by PocketFin.

Photo by Anastase Maragos on Unsplash

Lifestyle inflation happens when your standard of living increases drastically and former luxuries all of a sudden become the norm. 

Generally as you start to advance in your career your income tends to trend upwards, and so do your expenses! As earnings increase, it’s normal that you wish for a better car, or nicer clothes, because you think to yourself that you can now afford this and you deserve it! 

“The big mistake many individuals make is that they do not increase their savings portion inline with their expenses, and it’s incredible easy to rather spend more on lifestyle and just keep your savings rate the same year to year” says Pierre Van der Merwe, CEO of PocketFin – The Financial School of Real Life.

You could actually end up worse off compared to when you were earning less money because often these expensive lifestyle decisions are bought on credit.

Lifestyle inflation is often difficult to avoid because it isn’t always easy to see. Unless you just won the lottery, the increase in spending tends to happen slowly and is often disguised by the fast pace of life.

How lifestyle inflation can affect your finances negatively:

Let’s look at an example. Say you were to change jobs and earn 20% more than you were in your old job, lets just say you went from earning 5000$ a month to 6000$ a month.

This equates to a net raise of 1000$ a month or 12000$ a year. So lets then say that you start making some adjustments to your lifestyle.

Throughout the year, you make the following adjustments:

  • Entertainment/dining out : You spend an additional 250$ a month on eating out.
  • Clothing : You enjoy brand names and therefore spend an additional 150$ a month on buying a fancier item of clothing.
  • New Car: You upgrade your car and spend an additional 500$ a month on this new car.

As we can see here, it’s so incredibly easy to spend your valuable raise in income on very simple lifestyle decisions, the issue is now that you have spent that additional 20% raise on material goods and have not increase your savings rate of say 20% of your income inline with this 20% so in fact your savings rate now drops to 15% of your net income.

How to avoid the traps of lifestyle inflation

Automate your savings

Debit/stop order investing is fantastic as you make use of “dollar cost averaging” , buying throughout all the dips in the markets which is traditionally more beneficial than lump sum investing (ie – entering the market at one specific point) , by putting a debit/stop order on your payday your savings are done when you get paid and thus prevents you from overspending unnecessarily. Often people can say they are disciplined enough to do their own investments but this often is not the case.

If you don’t set it up automatically, when the cash piles up it’s tempting to spend for today rather than invest for your future. People regret not having saved more along the way. Few look back and wish they took more vacations in business class.

Invest outside of your company pension account

Just because you have a company pension fund does not mean your savings are taken care of. It is critical to explore and diversify your investments across various asset classes and investment vehicles. 

It would be an idea to explore investments such as unit trusts/mutual funds, ETF’s, shares, bonds etc as an example to help expand your wealth creation plan and not only rely on one investment vehicle such as a corporate pension fund.

Spend responsibly

It is difficult to not fall into the lifestyle trap but especially in the first 10 years of your working career it is absolutely critical to remain disciplined in your efforts to build wealth. In ten years would you rather have a solid foundation and be financially abundant or would you be stressed having minimal savings but trying to upkeep a flashy lifestyle?


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