With each increase in income, you increase your spending, usually on clothes, shoes, appliances, accessories, expensive restaurants, etc., with the belief that shopping or additional luxury services will make you feel better and happier.
The phenomenon of “lifestyle inflation” refers to a situation in which your expenses, perhaps your unconscious expectations of what you deserve, increase with your income. After a job promotion or a significant salary increase, people find themselves improving their standard of living, either immediately or over time.
Now, increasing your spending when you increase your income doesn’t seem like a bad idea, does it? Why make more money if you don’t enjoy the benefits?
In Bangladesh, per capita income rose by $ 327 in fiscal year 2020-21 to $ 2,554 (base: fiscal year 2015-16), according to data from the Bangladesh Bureau of Statistics (BBS). In terms of Bangladesh currency, per capita income is now 219,644 Tk ($ 1 = 86 Tk).
At the beginning of fiscal year 2019-2020, per capita income was estimated at $ 2,024. This means that the average income of Bangladeshis has increased by about 28,000 Tk in one year. However, increasing income would be of less value to an individual if their lifestyle follows the pace of income growth.
In the case of lifestyle inflation, a higher salary leads to higher bills while savings do not increase. As a result, an unforeseen emergency such as a medical expense, an accident, or a sudden “between work” situation can significantly affect your life, creating a financial burden accompanied by stress and frustration. If you are a victim of lifestyle inflation, it will make you break or keep you broken.
How do we become victims?
Before I talk about other victims around me, I’ll start with my own experience, which gave me a first-hand bittersweet taste of lifestyle inflation.
When I was a freshman in 2017, I started earning my own money by giving tutoring to elementary and high school students. When he needed to get somewhere, he walked or took public transportation. He could live on very little and still had money at the end of each month.
Still, things gradually changed as I began to write as a freelancer, alongside tutoring students. When I reached an income threshold, I moved in and started living independently. My spending was still moderate until I got a stable job last October.
When I received my first paycheck, I started thinking about all the things I could buy that I couldn’t before. And that “thinking” never stopped until last month. I moved to a residential area, subscribed to various streaming sites despite not having leisure time, stopped traveling on public transportation, started buying things I barely used, and so on.
Things that were once “luxuries” had quickly become “necessities” and my spending skyrocketed.
In just two months, my monthly expenses lived up to my monthly income. At that moment, I started my “rat race.” Even though I am an economics student and had read the rich father, the poor father during my sophomore year, somehow I managed to fall into the trap!
I’ve also seen some of my friends fall into the same trap! Recently, one of my friends got a job promotion with a salary increase of about 10,000 Tk. However, he did not improve his financial situation.
Now, he has more money, but the same problems, including: the financial struggle at the end of each month. Where did all their money go? – Apparently, he decided to upgrade his phone after the promotion and bought a way above its affordability. Now, a large portion of her salary goes to EMI every month.
If you continue on your path, you may also find yourself embroiled in the same financial struggles that you had multiple pay raises ago. Combining higher income with higher spending can only lead to a loop of financial misery.
What are the usual reasons for falling into the trap?
For most people, the lesson begins slowly. Therefore, to fight the disease, you need to know the reasons that may be causing it. The main reason for lifestyle inflation is to live beyond your means.
With each increase in income, you increase your spending, usually on clothes, shoes, appliances, accessories, expensive restaurants, etc., with the belief that shopping or additional luxury services will make you feel better and happier. Dopamine fever can last for a couple of hours or days, but reality is bound to hit you, pushing you even harder under the financial burden.
There are some factors that make you live beyond your means, such as law, social comparison, status pursuit, emotional spending, and so on. As you work hard to make money, you may feel justified in pursuing luxury. While rewarding yourself isn’t bad, too much of anything can damage your underlying benefit in the long run.
In the age of the internet and social media, access to people’s lifestyle is just a click away! As a result, you consciously or unconsciously compare yourself to your friends, co-workers, and even people you don’t know personally or who you meet in your day-to-day life. Social comparison can lead to excessive lifestyle inflation. No matter how much you want to catch up with other people’s lifestyle, there will always be someone who does it better, and you’ll always need more!
How to avoid falling into the common trap, but impossible to locate?
The key to avoiding falling into the trap is living below your means and gradually improving your lifestyle. You can start by preparing a monthly budget and keeping a portion of your payday pay. You can set aside a small amount of money to reward yourself if you spend the month successfully respecting your budget.
Take your time before making any expensive purchases, refrain from buying anything you can’t afford, avoid borrowing money to meet your impulsive needs, always measure the opportunity cost before spending on a product or service and find cheap places to hang out!
At the end of the day, your rational savings can give you more satisfaction than your irrational expenses. And every time you rush to make a big purchase, remember what Warren Buffet said.
“Don’t save what’s left after spending; instead, spend what’s left after saving.”
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and opinions of The Business Standard.