Inflation is a powerful term. It has helped change public discourse and has also been instrumental in rise and fall of governments. It is this fancy number which, of late, has been hovering not too far from the 5% (per annum) mark in India. Roughly put, this means that you are paying 5% more for the commonly used things than a year back. Of course, there are some bad years too as far as inflation number is concerned. And these bad years can dent your finances, especially if you are living paycheck to paycheck.
But has your cost of living really increased by around 5% (or whatever the inflation number is) over last year. And 5% over year before that?
There is no one size fits all answer to the above question. But for a good chunk of people this “inflation” number is probably more. This is more to do with tendency of ones needs, wants and desires increasing over a period of time. So, while inflation measures the price increase in a fixed basket of goods, your cost of living would have probably increased by that price rise (roughly around official inflation number) + cost of your needs that have increased over the year.
This number can be even 10 percent. Or 20 percent. Or even (minus) 5 percent if you have really adopted a frugal or minimalist living, though in long run, this negative number is unlikely to be sustainable due to inflation!
For instance, you shifted to a bigger house this year and your rent has increased by 25% … This is a contributor to your lifestyle inflation.
Moved on from domestic vacations to international ones? Add few more percentage points to your lifestyle inflation number.
Kids moved to a better and more expensive school? And they plan to study abroad? Consider this number
Cost of your healthcare has increased? Add this to the number as well.
So when you are in your “and then happily there after” financial planning mode and trying to figure out your requirements in terms of expenses, do consider your personalized lifestyle inflation number. It will most likely, be more than the inflation numbe that CPI or WPI indicates. And it can serve as a handy number to plan things out..
Originally published here