Finding Respite From Lifestyle Inflation

Pieces about the rising cost of living and how to combat them have become very common recently (iMoney has a few stories on that, too). Writers and reporters agree that it was indeed the hottest topic as we transitioned from 2013 to 2014. After all, nothing sells better than bad news.

I infer from most of these reports a broadly held sense of foreboding as we usher in the New Year. There doesn’t seem to be a sign to indicate that this year will be better. In fact, all signs lead us to believe that 2014 is going to be bleak, at least financially.

However, can we put the blame solely on the government’s efforts to rationalise subsidies? What will reducing gross development spending and containing the fiscal deficit at 3.5% of gross domestic product (GDP) mean to us, as consumers and the rakyat?

Yes, certain things could have been done better in the last few years to avoid this sticky situation we find ourselves in right now. As far as current economic policy is concerned, there will always be three schools of people – those who are against it, those who are for it, and those who are just indifferent towards it.

However, we can emerge as a victor in this financially turbulent time by taking an introspective look at our lifestyle.

While most people blame the government for reducing subsidies and increasing prices of various items, they forget that the rise in their expenses is also due to the changes in their lifestyles.

I remember when I graduated from university and landed my first job, my salary was a meagre RM1,600. The idea of surviving on RM1,600 a month now is unimaginable. I have no recollection of how I achieved that then.

A few years later, into my second job, I was earning twice of what I used to earn. But despite that, I still found myself living from pay cheque to pay cheque. In fact things were worse, as I had acquired two credit cards (and a lot of merchandise) by then.

I found myself wondering why doubling my salary did nothing to improve my financial situation. To make matters worse, I was even further in debt than before.

Enter “lifestyle inflation”.

Life inflation happens when we raise our standard of living following an increase in income. For example, when I was earning RM1,600 a month, my idea of eating out was dinner at the trusted roadside mamak near my apartment. Today, my idea of eating out during special occasions involves people judging each other on the usage of utensils for the right course.

The concept of eating out has changed dramatically in the past 10 years. Not only are we eating out more often, but have also upgraded to swankier restaurants over the years.

Before you think life inflation is a bad thing that should be avoided at all cost, let me assure you that it is not necessarily bad. After all, to improve our standard of living is the reason we work so hard.

At times, lifestyle inflation is unavoidable. For example, getting a promotion may require you to change the way you dress to work which translates to additional spending on your attire. As we get older and start a family, we may even need to buy or rent a bigger house and buy a bigger car to accommodate our growing family.

The better solution then is not to avoid lifestyle inflation but learning to manage it better. To manage lifestyle inflation means you can still get a brand new car, but ensure you can commit to it financially in a sustainable way. Saving up to afford the down payment on a new home is only half the battle. Can you afford to make the monthly repayments with your monthly income?

Prudence is the key word here. Being prudent means living within one’s means. Control the urge to splurge that is spawned by the abundance of malls, credit cards and online retailers. Also, don’t upgrade your lifestyle immediately after a big increment in income. Give yourself time to identify the things you can afford on a sustainable basis.

Once we understand what life inflation is, and how to combat it, we will be able to take control of our finances better. If your New Year’s resolution is similar to mine – which is to save a set amount of money, the chances of you achieving that is higher with better control of your finances.

Here’s to a prosperous New Year to you, and I look forward to sharing more financial news and tips with you in 2014.

Here are five tips that you can apply to mitigate the impacts of rising costs of living.