Whether one admits it or not – most of our lifestyle needs are inflationary in nature. This is in addition to the inflation that affects our day to day lives.
As life progresses one may feel the need to get better house, better cars, better facilities for kids, better vacations, more healthcare needs and so on. On few of the things where you were spending Rs. 100, you may be spending Rs. 200 two years later. And during this time the inflation may be like 5 percent.
So, how does this translate into your financial plan?
The inflation number that the government agencies release is based upon price of essentials like food and other daily needs. But your lifestyle may be more that just daily needs. If the inflation rate is, 5 percent, I’ll be underestimating by expecting my lifestyle needs to grow at the same 5 percent. This number will probably be more like 10 percent (or some number in between, if you have control over some chunks of this expense.)
And in case you don’t have control over lifestyle expenses and your needs grow exponentially, so will your lifestyle inflation!
And yes, there can be medical emergencies too, which we often fail to account for. If you are uninsured or under-insured, there is a good probability that this can burn hole in your pocket considering better but more expensive healthcare facilities and your increasing age which increases likelihood of need for medical treatment. The medical insurance which may be sufficient now, may not be sufficient a decade later.
Coming to your monthly expenses, suppose you have an expense of Rs. 100k per month. If you assume it to grow at 5 percent per annum (normal inflation, if the recent history is a good indicator) then the monthly expense will become 200k in approx 14 – 15 years.
But if your inflation is like 10 percent per annum, this number will swell to 400k in a similar time period. Which is the double of the number expected assuming 5 percent inflation.
For you to keep pace with this, your income needs to match this lifestyle inflation and probably a bit more if you are looking to increase your savings. If you are unable to, then be ready to cut corners or hope for some amazing returns on investments!
Does your financial planning consider lifestyle inflation? Think about it.
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(You may also link to read about personalized lifestyle inflation number)