Saturday, October 18, 2014

Managing the Lifestyle in inflationary times

Managing your Life style in inflationary times
                                                                    By: Anshul Srivastava
Life style is defined as a “way of living” of individuals, families and societies which is apparent in their physical, psychological, social and economic environments. It is reflected n behavior patterns, activities, attitudes, interests, opinions, values and allocation of income. There are various factors that affect lifestyle including culture, family, reference groups and social class.
The concept of lifestyle differs from person to person depending on the socio economic factors and it is very dynamic in nature. It depends on the age and stage in life cycle and social status. A younger individual in his mid twenties would like to buy an expensive electronic item like and i pad or a television while the buying decision for an older individual in forties would be more inclined toward buying a luxury car or planning for a vacation abroad.
The improvement in the lifestyle as one moves ahead in life can be attributed to two factors.
  1. Increase in the income levels
  2. Technological advancement
While increase in income level may induce the person to use a costlier thing to satisfy the same need (A car in place of bike to commute), technological advancement may necessitate the use of some equipment which might not be required in past (eg Mobile Phones)
The luxuries of the past are becoming the necessities of today. For example the use of purified water or purifying equipments which is an additional expense in most of the households today was not present 20 years ago. This along with the use of more than one mobile phone per household has also added to the cost which was not present in the households more than a decade ago. More such innovations might come in future.
The term lifestyle inflation is derived from the word” lifestyle”; it could be defined as the increase in expenses as a result of improved standard of living fueled by increased income. As the level of income rises, things like costly laptops, cellular phones, imported watches, electronic goods, cosmetics, fashion accessories etc which did not come under the head necessities hitherto will fall in the same category. In addition, the up gradation from one category of services to another on account of the increase in income more than offsets the percentage increase in income.
As an Example; going to a movie for a family of four would have been a transaction in the range of Rs 200-250/- close to 10 years ago, which might cost anywhere between  Rs. 1000-1500 if one decides to go in a prominent multiplex theatre today.
This implies inflation in prices somewhere in the range of 17%-20% per year over a period of 10 years, which is far more than the data released for inflation by official agencies.
While inflation affects common man, lifestyle inflation has the power to affect super rich also. According to a recent study by Swiss Banking major Julius Bayer “the rise in this Lifestyle Index, which measures the prices of high-end products used by HNWIs, is in fact much higher at 11.7 per cent than the overall consumer price inflation of 5.1 per cent for the region in the same period. It is not about managing inflation alone while it has a lot to do with keeping in pace with and living in accordance the latest technological developments around us which will go beyond mere numbers which is based on technological innovations which need not be anticipated. It is essentially a social consequence of financial inflation; other consequences could be economic and political.
One may like to guess that economies of scale should maintain the cost of lifestyle assets in line with economic inflation but it need not happen because of demand and other aspects.
While making decisions pertaining to lifestyle inflation, one should clearly differentiate the lifestyle choice and the investment decision. For Eg. Buying a Picasso or a hussain investment decision or lifestyle choice need to be carefully analyzed before being exercised.
The below mentioned projections and facts coupled with the demographic trends clearly indicate that the lifestyle inflation is a factor which most of the Indians will have to deal with in the times to come.
Projections about Indian economy mentioned in “The Bird of Gold: The rise of India’s Consumer Market” a Mckinsey Report published in 2007:
·         “Income levels will almost triple and India will climb from its position as the 12th largest consumer market today to become the world’s 5th largest consumer market by 2025.”
·         “Average real household disposable income will grow from Rs.113,744 Indian rupees in 2005 to 318,896 Indian rupees by 2025, a compound annual growth rate of 5.3 percent.”
·         “India’s middle class will swell by over ten times from its current size of 50 million to 583 million people. By 2025 over 23 million Indians- more than the population of Australia today- will number among the country’s wealthiest citizens.”
·         “By 2025 food, beverages & tobacco will still be the biggest category, although its share will have dropped from 42 % to 25%. Transport and health care will be the second and third biggest markets respectively. Communications, which accounts for only 2 percent of spending today, will be one of the fastest expanding categories with growth of over 13 % a year. Other categories that will see annual growth of over 8 % include transportation, personal products and services, health care, and education and recreation as these categories evolve into sizable markets.”
Thus we could imagine a scenario of 20 years later when one bottle of  drinking water could cost us  Rs. 500 and the cost of communication and commutation will form a bigger part of our expenses. This may happen in spite of reduction in per unit cost of the same on account of the increased consumption on our part. Advancement in technology may take us far like we have moved from the traditional landline phone to a gizmo like an  I phone in past 20 years, it is indeed difficult to predict what lies 20 years ahead of an I phone.
In this materialistic world, improved income induces one to indulge in acquiring and accumulating luxury products and services. While it cannot be said that it is completely unwise to do so, but short and long term financial goals should always be kept in sight. As the earning increases and one move ahead in the journey of life, the commitments have to be chosen wisely. If one follows certain thumb rules like, putting savings first and debt last , buying affordable house, cars and other life style products, and most important not falling into a debt trap then the risk of financial distress can be considerably reduced.
Certain ground principles if followed could help one not fall in the debt trap
  1. Never borrow for a depreciating asset
  2. Don’t borrow for an asset which doesn’t have a salvage value
While it is imperative for the lifestyle to  change, but keeping an eye on the expenses and keeping the principles of financial planning in mind, one can counter the impact of such changes.


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