You are wrong when you say that I want to arrange Rs 1 Crore within X years or by age Y.
You are even wrong when you say that I want to gift Rs 1 Crore to my son when he turns 18.
You are often wrong when you think Rs 1 Crore would suffice for my retirement and my wife.
Time and Tide and Inflation
I prove you wrong because you have not factored in the devaluation of Rs 1 Crore after x or y years due to inflation. Inflation is equal to the weathering of rocks, rusting, or decomposition of substances in a sense. As time goes on, money kept in your pockets loses its gravity against purchasing power. What you were able to purchase with Rs 1 Lakh 10 years ago would not be possible today, and what you can purchase today with Rs 1 Lakh, will not be possible to purchase with the same amount 10 years from now. In simple words, cheap gets costly, and costly gets costlier as time goes on. Say time, tide and inflation wait for none. It remains the same for everyone. The total inflation value is a direct compound multiple of time and the rate of inflation. Inflation is being calculated in many ways; two are popular. One is the WPI—wholesale price index, and the other one is the CPI—consumer price index. These inflation indices were designed by the government to relate inflation to expenses. But as a common person, I feel that these inflation figures are different from our day-to-day life experiences.
Life style induced Inflation
Another kind of inflation that can be described logically but without parameters, which is usually ignored by many but is always in existence, is Lifestyle-Induced Inflation. This is very much an indefinite inflation count and cannot be described in any terms. It has no boundaries. As the income increases with time, the aspirations of a person too increases and they tend to spend more even beyond their income sources. Credit facilities available today plays a dominant role in Lifestyle-induced Inflation.
Money on credit is a real culprit
Lifestyle-induced inflation can be described by many examples. Whenever you look to change any of the gadgets you use, you like to switch to an upgraded version only, even if it is a mobile, TV, watch, or any kitchenware. Whenever you try a new way of dining out, you don’t care for the price list. When you go to see a movie at a multiplex, you don’t care for the price of popcorn and/or samosas with cold drinks, along with costly tickets. If you switch to a bike from a cycle, or to a car from a bike, or from an entry-level car to a higher-level car with top variants, it certainly costs you, and if it reaches beyond your pocket size, you tend to acquire it on loans and pay it back in EMIs. EMI comes with a cost, which is interest. So ultimately, interest adds up to Lifestyle-induced Inflation.
You see, the lending industry in India has a size of around 270 billion USD this year and is likely to grow to 350 billion USD by 2023. It shows the tendency of Indians to take goods and services on loan. The rate of interest varies from 10% to 36% per annum, depending upon the credit profile of the borrower. This is very expensive borrowing, and it undoubtedly adds up to lifestyle-induced inflation.
In the same way, the credit card industry plays a vital role in increasing Lifestyle-induced Inflation. Today, the country has about 75 million cards, with HDFC Bank, SBI Card (a subsidiary of State Bank of India), ICICI Bank, and Axis Bank being the leading issuers. However, only about 35 million people have access to credit cards, considering an average user has two cards. Credit card spending is considered as spending before income.
Control the controllable
The challenge today is to control Lifestyle-induced Inflation, which is over and above normal inflation. And it is controllable. You can’t omit Lifestyle-induced Inflation completely but control it to a certain level unless you become a saint with no aspirations at all. Control over aspirations, ambitions, and wants can lead to a lowering of Lifestyle-induced Inflation.
Needs vs wants
One must differentiate needs from wants. Needs are limited and wants are without limit. Unlimited wants may lead you into the depths of lifestyle-induced inflation.
Plan before it hits back
Now come back to the start of this article. Would 1 CR be sufficient after, say, 15 years or 20 odd years? In reality, 1 CR is only a figure. One needs to approach an expert who can help calculate the real, inflation-adjusted future value of expenses. It can be 1 CR or any other odd figure. Whatever inflation-adjusted future figure comes out of the box, an expert can tell you the way to achieve this magical figure. It is never too late to get proper planning to achieve future inflation-adjusted figures. So, what are you waiting for? Just approach a financial expert today and plan with him.
Tips For Preventing Lifestyle Inflation
Avoiding lifestyle inflation is not something that is frequently done on a daily basis. You can learn a lot about how to escape the horrors of lifestyle inflation with common sense and a five-minute read. You must carry out any or all of the following to keep things simple:
1. Make a responsible spending plan (spend only what’s left after saving).
2.Stop trying to impress others and start impressing yourself.
3. Avoid incurring new debt (aim for debt-free status).
4. First, pay yourself (save for your rainy days).
5. Profit from tax deductions (take every penny from the tax man legally).
6. Stop feeling entitled (everything isn’t your cup of tea).
7. Stay away from “huge spenders.” (Protect yourself from spending-minded people).
This article is written by Ajay Kumar Jain, CMD, Swaraj Finpro Private Limited.