Course Code: FINM505 Course Title: Managerial Economics

Course Instructor: Dr. Tawheed Nabi Section: Q2253

Academic Task No.: 02 Academic Task Title: Lifestyle Inflation goes

unnoticed
Date of Allotment: 23rd April 2023 Date of submission: 16th May 2023

Name: Diksha Registration No.: 12200971

Learning Outcomes: To be able to understand the fundamentals and the working of various
mutual fund schemes and further use the knowledge for investment purposes.
Declaration: I declare that this Assignment is my individual work. I have not copied
it from any other student’s work or from any other source except where due
acknowledgement is made explicitly in the text, nor has any part been written form
by any other person.
Students Signature:

General Observations Suggestions for Improvement Best Part of Assignment

Evaluator’s Comments (For Instructor’s use only)

Evaluator’s Signature and Date:

Marks Obtained: Max. Marks:

Peer Rating.

S.No Name Rating

1. Vinay Rajpoot 10/10
2. Paras Gupta 10/10
3. Divyansh Goyal 07/10
4. Diksha 10/10
Identification Of the Main Issue/Problem

Lifestyle inflation is a common problem that can sneak up on people. It happens

when people's spending increases as their income rises. This can lead to several
problems, including:

➢ Difficulty saving money.

➢ Increased debt
➢ Financial stress
➢ Lack of financial freedom

There are several reasons why lifestyle inflation can go unnoticed. One reason
is that it can happen gradually. When people's income increases, they may not
notice that their spending is also increasing. Another reason is that people may
not be aware of the impact of lifestyle inflation on their finances. They may
think that they can afford to spend more money without any negative
consequences.

There are a few things that people can do to avoid lifestyle inflation. One
important step is to create a budget. A budget can help people track their
spending and make sure that they are not overspending. Another important step
is to set financial goals. Having financial goals can help people stay motivated
to save money and avoid lifestyle inflation.

Here are some of the main issues and problems associated with lifestyle
inflation:

➢ Difficulty saving money: When people's spending increases, it can be

difficult to save money. This is because there is less money left over after
expenses are paid. This can make it difficult to reach financial goals, such
as saving for retirement or a down payment on a house.
➢ Increased debt: Lifestyle inflation can lead to increased debt. This is
because people may borrow money to finance their lifestyle. This can
lead to a cycle of debt that can be difficult to break.
➢ Financial stress: Lifestyle inflation can lead to financial stress. This is
because people may feel overwhelmed by their debt or the lack of money
they have to save. This stress can have a negative impact on their physical
and mental health.
➢ Lack of financial freedom: Lifestyle inflation can lead to a lack of
financial freedom. This is because people may be tied down to their jobs
or their debt. This can make it difficult to take risks or make changes in
their lives.
There are several things that people can do to avoid lifestyle inflation.
Here are some tips:

➢ Create a budget: A budget can help people track their spending and
make sure that they are not overspending.

➢ Set financial goals: Having financial goals can help people stay
motivated to save money and avoid lifestyle inflation.

➢ Avoid debt: Debt can lead to financial stress and make it difficult to save
money. Avoid taking on debt unless it is necessary.

➢ Live below your means: This means spending less money than you earn.
This can help you save money and avoid lifestyle inflation.

➢ Be mindful of your spending: Pay attention to what you are spending

your money on. This can help you identify areas where you can cut back.

➢ Avoid comparison: It is easy to compare your lifestyle to the lifestyles of

others. However, this can lead to feelings of inadequacy and make you
more likely to spend money you don't have.

➢ Be patient: It takes time to build wealth and avoid lifestyle inflation.

Don't get discouraged if you don't see results immediately. Just keep at it
and you will eventually reach your goals.
Analysis of the Issue in the Case Study: -
The issue described in the passage is that individuals like Mr. Maram, Mr.
Parikh, and Ms. Ruchika have experienced a significant increase in their
expenses over the past few years. However, contrary to their initial assumptions,
the rise in expenses is not due to external factors such as food inflation or high
Consumer Price Index (CPI). The passage attributes this increase in expenses to
a phenomenon known as lifestyle inflation.

Lifestyle inflation refers to the tendency of individuals, particularly those in

their mid-twenties to early thirties, to increase their spending as their income
rises. These individuals often have high aspirations and disposable income, as
they are at a stage in their lives characterized by rapid career advancement and
increased earning potential. With more money available, they indulge in
luxuries, fashionable goods, trendy brands, and a more extravagant lifestyle.

In the examples provided, Mr. Maram has started dining at more expensive
restaurants more frequently, Mr. Parikh and his family have started taking
international vacations instead of local trips, and Ms. Ruchika has increased her
frequency of weekend getaways. These changes in lifestyle choices have led to
a substantial increase in their expenses.

The passage highlights that this trend of lifestyle inflation is often unnoticed by
those experiencing it, and it can have a contagious effect on others. While
people may not be actively discussing savings or future financial plans, they are
more likely to discuss their weekend plans and indulgences. Financial experts
refer to this phenomenon as "silent inflation" because the gradual increase in
expenses may not be immediately noticeable or feel burdensome.

However, the passage also emphasizes the importance of sound long-term

financial planning to sustain such a lifestyle. Experts estimate that lifestyle
inflation typically results in a 15-20 percent increase in expenses per year, while
income growth tends to be much lower. Without proper financial planning,
individuals may find themselves struggling to maintain their desired lifestyle in
the long run.

In summary, the issue presented in the passage is the increase in expenses

experienced by individuals due to lifestyle inflation. It explains that as people's
income rises, they tend to spend more on luxurious and trendy items, which
gradually increases their expenses. The passage highlights the need for long-
term financial planning to support such a lifestyle.
Strategy to avoid Lifestyle Inflation: -
To avoid falling into the trap of lifestyle inflation and the subsequent increase in
expenses, individuals can take several proactive steps. Here are some solutions:

1. Create a budget: Establish a budget that allocates specific amounts to

different categories of expenses, including eating out, vacations, and travel. Set
realistic spending limits for each category based on your financial goals and
priorities.

2. Track expenses: Keep a record of all your expenses to gain a clear

understanding of where your money is going. Utilize mobile apps or online
tools to track your spending easily and identify areas where you may be
overspending.

3. Set savings goals: Determine specific savings goals and commit to saving a
certain percentage of your income each month. Prioritize saving for future
financial needs such as emergencies, retirement, or major purchases.

4. Delay gratification: Practice delayed gratification by resisting the urge to

immediately indulge in expensive purchases or experiences. Consider whether a
particular expense aligns with your long-term financial goals and whether it is a
necessary or frivolous expenditure.

5. Differentiate needs from wants: Clearly distinguish between essential needs

and discretionary wants. Focus on meeting your basic needs before allocating
funds for luxury items or experiences. Make informed decisions about what
truly adds value to your life and brings you lasting satisfaction.

6. Automate savings: Set up automatic transfers from your income to a

separate savings account. By automating savings, you ensure that a portion of
your earnings goes towards your future financial security before you have a
chance to spend it.

7. Regularly review and reassess expenses: Periodically review your spending

patterns and evaluate whether they align with your financial goals. Identify
areas where you can adjust, cut back on unnecessary expenses, and redirect
funds towards more important priorities.
8. Seek financial advice: Consult with a financial advisor or planner who can
provide personalized guidance and help you develop a comprehensive financial
plan. They can assist in creating a strategy to manage your income, expenses,
and savings effectively.

9. Cultivate mindful spending habits: Practice mindfulness when making

purchasing decisions. Consider the long-term impact of each expense on your
financial well-being and evaluate whether it aligns with your values and goals.

10. Educate yourself about personal finance: Continuously educate yourself

about personal finance concepts, investment strategies, and money management
techniques. Stay informed about economic trends, inflation rates, and the
potential impact on your expenses.

By implementing these solutions, individuals can avoid lifestyle inflation and

make informed decisions about their expenses, enabling them to maintain a
healthy financial balance and work towards long-term financial stability.
Reference: -

https://www.cnbctv18.com/personal-finance/inflation-is-your-enemy-here-is-a-
quick-look-at-its-impact-on-your-savings-4533151.html

https://www.investopedia.com/terms/l/lifestyle-inflation.asp

https://cleartax.in/g/terms/lifestyle-inflation

https://theweek.com/finance/1020966/what-is-lifestyle-inflation-and-how-does-
it-limit-wealth