Watch your lifestyle spends carefully

Gaurav RoyBigdecisions.inAs yesterday's luxuries become today's necessities, not watching out can have dire consequences for your retirement.

What has hitherto been perceived to be a western, or more specifically, American (personal finance) sin, is slowly but definitely seeping into urban Indian lives. Definitions which abound in many online fora are largely centered around sudden increases in disposable income or windfall gains leading to a splurge on "lifestyle" items, which eventually become necessities. For instance Investopedia defines lifestyle creep as: A situation where people's lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities. An important point to highlight here is, it is indeed about "creep", not necessarily the large, visible items... like the exotic vacation, investment in the timeshare or the larger car (which does no more than take you from one place to the other), the latest smartphone you must get (even though the one you bought last year is working quite well), but the small indulgences. For instance inflated grocery bills with gourmet additions/ substitutions, liquid soap instead of bars, the photography magazine subscription (which you do not have time to read), the Starbucks latte you pick up before work every morning, the wi-fi router you never switch off (because the electricity bill doesn't pinch you anymore). •  Having experienced this first hand, both in terms of the creep and the hardship when I needed to pull back, what I have learnt is: Not watching out and letting things slide is easy. "NOT monitoring your finances, is indeed effortless!" •  Pulling back on your lifestyle when you stare down the cold barrel of frugality (say because of a job loss) is akin to cold turkey treatment. •  The silver lining is the realisation (as it dawns): How LITTLE you REALLY NEED to get by and how much all those superfluous little indulgences eat into your "rainy day fund"! Lifestyle creep, like similar sins is usually born and nurtured when money is plentiful and keeps rolling in. For instance, it could start with paying off your huge mortgage (which forced you to scrimp all these years) with the bonus from your stellar performance in the last quarter. Now suddenly with no mortgage to pay there is loads of surplus cash, which you can spend. This prompts you to take that long awaited exotic vacation in Seychelles! Of course, you deserve the reward and should celebrate your loan closure and your performance. You aren't yet a victim of creep but --> could get there. It all depends on what you do next. So the very next year, when you decide to hit the exotic beach sand again, (only with no generous bonus to fund it this time), but its something you think you have earned because of the perpetual increase in cash flow you have created (by paying off your mortgage). You follow this up by planning another one and soon (Goa/ Kerala don't make the cut anymore), the indulgence has become a habit and is an integral part of your annual budget. 'Lifestyle' has indeed 'crept' up on you. It is however, important to reiterate the distinction:An occasional indulgence isn't lifestyle creep, as long as it stays occasional. It is lifestyle creep only when it becomes a habit.

So it is important to illustrate here that the paying off the mortgage saved you money and created an opportunity to build wealth. Spending the surplus in perpetuity simply spurns this opportunity. You should have stashed it! When the exotic vacation habit pushes you to max out your credit limit (since you aren't able to meet the expense with your earnings any more) and pay for it in installments (along with a hefty interest), lifestyle creep has truly overwhelmed you and impaired your finances. Preventing this isn't rocket science!!! This advice has been doled out ever since we have moved beyond drawing on cave walls. SAVE FIRST... THEN SPEND WHAT'S LEFT -- & -- STASH THAT WINDFALL!!! Every time you have a windfall, or get a raise or come into some extra money, STASH IT! Like we have discussed ad nauseum, expenses always expand to use cash available or what is the 'perceived' cash available. So what's the bottom line? Not watching your lifestyle spends whether they are the visible large items or the unnoticed invisible ones will end up bloating your regular living expenses where it is bound to catch up with an expanding income in your working years. With most of us too busy to notice these creeping increases which are often camouflaged under the garb of "moving up in life", it is only a matter of time before some of these changes get built into our lives quite irreversibly. What was a luxury yesterday turns into a "necessary comfort" which we are "depriving ourselves of" if we forego it.

The seduction by "retirement product advertisements" that show a 60+ years old, graying gentleman discovering his (financial & personal) freedom can be a little misleading. Since most of us never really budget such spends into our retirement expenses, the corpus we are likely to set aside for the golden years will in all likelihood, fall short!