More money, same problems? Lifestyle inflation may be catching up with you

The phenomenon 'Lifestyle Inflation' refers to a situation when your spending – perhaps your unconscious expectations of what you deserve – rises with your income. After a job promotion or a significant rise in salary, people find themselves upgrading their standard of living, either immediately or over time.

Now, increasing your spending when your income increases – does not seem like a bad idea, does it? Why make more money if you are not going to enjoy the benefits of it?

In Bangladesh, the per-capita income rose by $327 in FY 2020-21 to $2,554 (Base: FY 2015-16), according to data from the Bangladesh Bureau of Statistics (BBS). In terms of the Bangladesh currency, the per-capita income is now Tk219,644 ($1 = Tk 86).

Earlier in FY 2019-2020, the per-capita income was calculated at $2,024. That means the average income of Bangladeshis has increased by about Tk28,000 in a year. Nevertheless, the increased income would have less worth to an individual if his/her lifestyle keeps pace with the growth of income.

In the case of lifestyle inflation, a bigger paycheck leads to bigger bills while savings fail to increase. Consequently, an unforeseen emergency like a medical expense, accident, or a sudden 'in-between job' situation can significantly impact your life, creating a financial burden accompanied by stress and frustration. If you are a victim of lifestyle inflation, it will either make you broke or keep you broke.

How do we become a victim of it?

Before talking about other victims around me, I will start with my own experience, which offered me a first-hand bittersweet taste of lifestyle inflation.

When I was a freshman in 2017, I started earning my pocket money by tutoring primary and secondary-level students. When I needed to get somewhere, I walked or took public transport. I could live on very little and still had money by the end of every month.

However, things gradually changed as I started writing as a freelancer, alongside tutoring students. When I reached an income threshold, I moved out and started living independently. My spending was still moderate until I got a stable job last October.

When I got my first paycheck, I started thinking of all the things I could buy that I couldn't earlier. And that "thinking" never stopped until last month. I moved to a residential area, subscribed to several streaming sites despite no leisure time, stopped commuting via public transport, started buying things I barely used, etc.

Things that were once "luxuries" had quickly turned into "necessities", and my spending skyrocketed.

In only two months my monthly expenditure was on par with my monthly income. At that point, I began my "rat race." Even though I am a student of Economics and had read Rich Dad Poor Dad during my sophomore year, I somehow managed to fall into the trap!

I have seen a few of my friends falling into the same trap as well! One of my friends recently got a promotion in his job with a pay raise of around Tk10,000. However, it did not improve his financial condition.

Now, he has more money but the same problems, including – financial struggle at the end of every month. Where did all his money go? – Apparently, he decided to upgrade his phone upon promotion and purchased one way above his affordability. Now, a huge chunk of his salary goes into paying EMI every month.

If you follow his path, you may also find yourself entangled in the same financial struggles you had multiple pay rises ago. Pairing a higher income with a higher expense can only drive you into a loop of financial misery.

What are the common reasons behind falling into the trap?

For most people, the lesson dawns gradually. Therefore, to combat the disease, you need to know the reasons that might be causing it. The main reason that causes lifestyle inflation is – living above your means.

With each increase in income, you increase your spending, usually on clothes, shoes, gadgets, accessories, expensive restaurants, etc., with the belief that the additional luxurious purchases or services will make you feel better and happier. The dopamine rush may last for a couple of hours or days, but the reality is bound to hit you, pushing you further under the financial burden.

There are a few drivers that make you live above your means, such as entitlement, social comparison, status-seeking, emotional spending, etc. As you work hard to earn money, it may feel justified to splurge and treat yourself to luxurious things. While rewarding yourself is not bad, too much of anything can damage its underlying benefit in the long run.

In the era of the Internet and social media, access to people's lifestyles is just a click away! As a result, you consciously or subconsciously compare yourself to your friends, co-workers, and even people you do not know personally or encounter in your day-to-day lives. Social comparison can cause excessive lifestyle inflation. No matter how much you want to catch up with other people's lifestyles, there will always be someone who is doing better, and you will always need more!

How to avoid falling into the common yet untraceable trap?

The key to avoiding falling into the trap is living below your means and gradually upgrading your lifestyle. You can start by preparing a monthly budget and keeping a portion of your salary aside on your payday. You can set aside a small amount of money to reward yourself if you successfully spend the month sticking to your budget.

Take your time before making any expensive purchase, refrain from purchasing anything you cannot 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 spending. And every time you are rushing for a big purchase, remember what Warren Buffet said.

"Do not save what is left after spending; instead spend what is left after saving."

 Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.