Inflation is not the only major hurdle in wealth creation but this too!
We have already discussed in one of our previous articles, how inflation depreciates the value of money — Inflation is a silent killer.
A brief recap:-
The purchasing value of ₹100 today won't be the same year after. That means if something costs 100 today will cost more a year later.
But recently I noticed that there's something more to be worried about other than inflation.
Inflation is not alone in wealth destruction, it has got a powerful ally that is unknowingly created by us only.
A few days back I turned 22, as always there were a bunch of friends asking for a treat. I found out that the cost of birthday treats among my friends has increased dramatically. It's not just to me but to all of us (in my circle). A few years back we weren't throwing such expensive treats to each other on any occasion.
Let me be more specific. When I was 17, back in school days, the cost of such birthday treats, not just birthday parties but also the cost of hanging out was much lower than what it is today. It has increased multiple folds since then.
For us, a group of 4 people (yes! My circle is small.😎) usually ₹700 used to be more than enough for partying & chilling out during our school days for all 4 of us combine. But today it's not the same anymore, it has reached to around ₹1500!
So you see it has more than doubled in last 5 years. The average annual growth rate stands at more than 15%.
I checked the average inflation rate since last 5-6 years stands around 5.5% (source)
Before I move further I want you to recall the cost of hanging out today and then compare it with the cost 5 years back. If not exactly 5 years, you can simply take the overall total amount you used to spend during your school days while hanging out with your friends.
How many folds has it increased?
Comment below, I want to know it.
Back to our story. As you see our spending increment is not in line with the inflation rate. (at least, not mine!)
Here comes the main course!
So what is it? Our expenses are rising like Tesla's rockets!
It's surprising. As well as alarming!
We call it 'LIFESTYLE INCREMENT'
As we are moving from study life to our work life, our so-called 'always wanted' lifestyle is taking charge of our brains.
We cannot control inflation. But the least we can do is to limit our lifestyle increment.
You cannot totally avoid this lifestyle increment but one thing we can do for sure is to consider it & limit it, specifically during our initial earning period.
The inflation rate is around 5% to 6%. While our lifestyle increment over & above inflation is around 7%, I'm assuming.
So 12% year on year increase in expenses! Isn't it scary?
How to identify Lifestyle Increment?
You don't need to do anything but answer yourselves a bunch of questions.
Here you go:-
— Are you hanging out at the same restaurant/cafe/place where you used to say five years back? Or have you moved on to someplace nicer or superior to the previous one? And how much money you used to spend earlier on outings? Compare it with present-day expense.
— How much amount you used to spend on clothing five years back? How much is it now? Has it doubled or even tripled?
— A few years back how many movies you have watched in theatres? Has the number increased now?
— Are you spending more on experiences such as vacations & traveling?
I hope I have given you good self-realization of your own lifestyle. Or haven't I?
You may add more questions around your spending habits & all you have to do is compare it with the past expenditure as well as behavior.
But why is it alarming?
Simply because even the best tool for passive wealth creation — Equity investments is assumed to deliver 12% to 13% average return per year and that too over a long period of time.
Basically, the major source of passive income gets paralyzed in front of the inflation+lifestyle duo.
If you are on a path of financial wellbeing, the major hurdle, even more dangerous than inflation would be your Lifestyle Increment.
So Next time you plan your finances, do consider the inflation rate but don't forget the lifestyle increment rate.
That is it from my side. I hope you got to know something new today.
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