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Aug 03, 2011, 11.40 AM IST | Source: Moneycontrol.com

Lifestyle creep: One item at a time! Happens slowly

Did you realize that you grow old one day at a time, you grow fat one kilo at a time….it is all an SIP..similarly lifestyle creep also happens slowly.

Lifestyle creep: One item at a time! Happens slowly
By PV Subramanyam

Did you realize that you grow old one day at a time, you grow fat one kilo at a time….it is all an SIP ..similarly lifestyle creep also happens slowly. Over a long period of time (could be as small as say 4-5 years) when a person moves from a simple middle class guy/gal to a ….much higher lifestyle!

Look at the Americans not just at the Indians..Americans do things in style. So whether it is getting into a financial debt trap, chapter 11 bankruptcy claims, or living far beyond their means, they have a term for all of that. Like subprime. Like lending $700,000 to a person earning $ 17,000 per annum. They create products like “interest only”, “balloon repayments” or “increasing mortgage” – it does not matter!

One such term they have created is Lifestyle creep.

What is lifestyle creep?

It is about people increasing their standard of living with temporary income – thus not being able to maintain it when the income suddenly disappears -Lifestyle creep is particularly a problem to those individuals approaching retirement. People, a few years before retirement are typically in their peak earning years, but at the same time many of their earlier expenses, such as paying off a mortgage, or raising a family have vanished. Suddenly with a new found surplus of cash, some people use it to buy more expensive cars, more expensive vacations or possibly a bigger home.

Since the goal in retirement is to maintain the lifestyle enjoyed in the last few years before retirement, these retirees require more funds to support their new, more lavish lifestyles. Unfortunately, they don’t have the resources to do this because they spent their surplus cash flow.

This is somewhat akin to the ant and the grasshopper story – the advice somebody can give them is “if you were singing during the summer, go and dance in the winter”.

So suddenly you have people who have “upped” their lifestyle with temporary income (come on, you knew it will end on the day you retire) and now they can now wonder how to continue this “temporary addictions”!

"CA P V Subramanyam is a Trainer and runs www.subramoney.com "

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PV Subramanyam, a Chartered Accountant by qualification, is a trainer in the financial services sector. He is the author of Retire Rich Invest Rs. 40 a day. After a 20-year career in the financial services industry, from equity broking, mutual fund advising, corporate finance advising and personal financial planning, Subramanyam turned to training. He writes regularly for financial websites and magazines. He blogs at www.subramoney.com


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