A phenomenon that is often less obvious to most people is lifestyle inflation, otherwise known as “lifestyle creep”.
It occurs when a rise in discretionary income, the amount available to an individual after making essential expenses, prompts an increase in living standards as luxuries become new necessities.
Financial literacy is an important aspect of learning what strongly impacts your quality of life. It affects your ability to navigate through economic downturns and your response to unexpected financial windfalls. Changes in financial fortunes happen to us in varying measures, influencing how we save, spend and invest.
Without a plan, it becomes more difficult to resist increased spending: the urge to upgrade your cable subscription, enjoy fine dining, add more items to your cart, and add a few more luxuries to your travel experience. The list of possibilities is endless when you have more money to spend on optional items. It all adds up quickly and when you adapt to your new lifestyle, it becomes more challenging to give up former luxuries that now feel like necessities.
It’s not all bad though. A measure of lifestyle inflation is unavoidable and not entirely unacceptable. It is okay to reward yourself, however you must avoid situations where subtle increases in your expenses become obstacles on your path to achieving your financial goals.
The younger population, in particular, should pay more attention to lifestyle inflation given its potential long-term impact on investment goals. Research in the United States indicates that most inflation-adjusted wage growth occurs in the early working years of the population. It is likely that a similar pattern occurs in Nigeria. This implies that failure to keep lifestyle inflation under control in your early working life may cost you the opportunity to make investments that will be more valuable later in your career.
Lifestyle inflation can be best managed by creating a system that makes it easy to save and invest your money. Here are two simple recommendations that could help you build habits to limit the impact on your financial goals.
