Published on July 8th, 2010 | by drkkr11
RISING inflation raises the specter of an increase in the cost of living. But for most of the middle class with high aspirations, the main reason why their salaries are never enough is they acquire expensive tastes and desires as their salaries rise. Lifestyle inflation is the order of the day…
Lifestyle inflation indicates the rise in your lifestyle expense, which you need to consider even if the headline inflation (the data published every Thursday) is not soaring. There are two versions of lifestyle inflation. One expense taste and desires, which is also the function of choices available, coupled with higher purchasing power. For example, earlier you would have been watching movies in a small theatre in your neighborhood. But now, you would have upgraded to multiplexes. That simply means a jump in your ticked costs from Rs.100 to Rs.250. This jump in lifestyle costs is lifestyle inflation. Another way to define your lifestyle inflation is the nature of your consumption. For example, if your hobby is to travel and explore the earth, then it is expensive today, considering the soaring oil prices.
Earlier, the concept of lifestyle inflation was not prevalent. The reason being, the growth was not prevalent. The reason being, the growth in income of most individuals was usually 5% over and above the inflation. Hence, people in earlier generations saw lesser or no surplus income in the individual’s hands. Now, the income grows a minimum of l0% in excess of inflation. Second, the salary structures of people working in the private sector realize higher disposable income as most companies don’t deduct retirement benefits. So, the affordability is much higher which makes people succumb to inspirational and peer pressures. Third, people have to actively save and invest to live off their saving in future.
The lifestyle inflation bug hits individuals who are in the range of 35-40 years. This is the age where individuals stretch themselves to buy the latest car or the LCD TV even if that siphons off their bank balance. They are ready to take higher EMIs for their Honda City and subsequently replace it with a Toyota Corolla even before completing the loan tenure. If an individual is over 40 year, they show more maturity and just look at a car more from the utility perspective than the status symbol. Also, an individual doesn’t expect as sharp an increase in his income at this age as in his thirties, experts say.
Whenever you invest in as instrument, compute the future value after accounting for an inflation of 8-10% to get accurate results. Fixed deposits, PPF or NSC assure safe returns, but are not capable of beating the inflation. Real estate, gold, and equity are considered good hedges against inflation on a long-term basis. Its crucial to provide a certain mark-up at the planning phase itself. For retirement planning, every individual has to a certain loading on the numbers today based on their lifestyle to get the required future value. Again, this loading has to vary from period to period so as to reflect true value.