Otherwise known as “lifestyle creep”, FBNQuest said lifestyle inflation is a phenomenon that is often less obvious to most people but 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.
Changes in financial fortunes, according to research analysts at the asset management firm, happen to people in varying measures, influencing how they save, spend and invest. Without a plan, they said, it becomes more difficult to resist increased spending: the urge to upgrade one’s cable subscription, enjoy fine dining, add more items to their cart, and add a few more luxuries to their travel experience.
Financial literacy is an important aspect of learning what strongly impacts one’s quality of life. It affects the ability to navigate through economic downturns and the response to unexpected financial windfalls.
“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,” FBNQuest said, adding that “It’s not all bad though.”
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According to a report by the asset management firm, the 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.”
Speaking to the age group that needs to pay more attention to lifestyle inflation, the asset management company pointed at the younger population.
It said it is due to the potential long-term impact on investment goals that is why the age group have to take lifestyle inflation seriously. Quoting research data from the United States, it said 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,” it said.
Lifestyle inflation, according to FBNQuest can be best managed by creating a system that makes it easy to save and invest your money.
The asset managers at the research arm of the company recommended two measures that could help consumers in building habits to limit the impact on their financial goals.
The need to create a reverse budget that treats their goals as bills is the first measure highlighted by FBNQuest. “This is a simple spending plan where your primary focus is on saving and investing first, before taking care of any other expense.”
Automation of finances was the second recommendation. The key focus should be on investment and savings, it said.
“Few people find a way to increase their savings over time, however, modern technology has provided platforms that make it easy to escalate savings and investments routinely. The great thing about automating your finances is that it offers an opportunity to seamlessly create a new habit. Research shows that you are more likely to succeed at things that become habits than at things that require change because we are wired as humans to resist change.”
