 "Spare a thought for lifestyle inflation")
SLI refers to increase in an individual's expenditures that can be attributed to his/her rising aspirations for a better standard of living. In the above example, the increase in movie ticket prices from Rs 25 to Rs 250 is not the right comparison, as the Rs 25 ticket was for single-screen and the Rs 250 ticket is for a multiplex that is invariably housed in a shopping mall. A single-screen ticket today costs approximately Rs 80-100, which is more expensive than before. While this rise can be attributed to the general inflation, the difference between Rs 100 and Rs 250 ticket is due to SLI.
Although SLI can be firmly rooted to one's financial background, its manifestation can be linked to an individual's life stage, confidence in one's financial position, emotional values, and a host of other factors.
Life-stage evolving SLI
The SLI for a household is never the same and keeps evolving along with the rising living standards. With increasing pay packets, the aspiration quotient sometime jumps multi-fold across life stages.
To illustrate, individuals during their first jobs or couples with double income and no kids in the early days of their careers may settle for budget holiday destinations, which are easy on their pockets. However, as they rise in their careers their choice of holiday locations would move upscale, choice of properties for hotel stay would change for better and the budget for holidays would also see an increase. Thus, when you plan your long-term vacations, you should incorporate the SLI-based inflation.
Emotional SLI
With better financial backing, individuals would want to achieve objectives that they could not [either for themselves or for others] achieve in the past. In such cases, traditional inflation measures to project the financial corpus required for various objectives in the future may fail. This is because higher aspirations come at a higher cost.
For example, working parents [double income, single kid] in the age bracket of 32-38 years and employed in multi-nationals would have good disposable monthly savings. They would prefer to educate their kids in international schools, since they can afford to the high fees. More often than not, parents themselves would have studied in state-board schools. But when it comes to their kids, they are not willing to settle for state-board schools.
In the new-age international school, often the fee for pre-primary classes is what parents may have spent for their entire schooling. However, this rise in cost cannot be attributed to CPI-based inflation alone. The inflation rate applicable for the kid's education costs is way higher and parents planning for their kid's education in such schools should incorporate SLI in their plans if their target is to be achieved.
Financial confidence
The perception of risk by an individual changes with changing times. When times are good, investors are willing to take higher risks. But in bad times they would prefer to take no risk. It is for this reason alone, that a lot of individual investors tend to buy stocks at high prices and sell them at lower prices, rather than doing the opposite. This principle holds well when it comes to individuals taking decisions regarding their aspirations/objectives and that's where traditional inflation measures fail and SLI comes into play.
For example, a 26-year old made a plan in 2013 to buy a car in 2014. The car was meant for his day-to-day driving within the city. Since there was a lot of uncertainty in the economy and job market at that time, he planned to buy a second-hand car with a modest budget of about Rs 3 lakh. But by September 2014, since the economy has improved, he actually ended up buying an entry-level sedan for Rs 7 lakh. Typically, a financial plan would have provided for a 15-20 per cent escalation in the budget for the car that was to materialise within a year. The additional gap is purely the SLI factor coming into play and such gaps [in this case almost double than the original planned outlay] can be quite dangerous to an individual's financial position.
Retirement trends
While SLI generally tends to move prices upwards, the one other instance where SLI actually tends to reverse its trend is when it comes to retirement costs. Most people, especially in the age group of 35-45 years, tend to forecast their retirement corpus needs to their current standard of living. For instance, retirement goals can be summed up like this: 'Today I spend Rs 1 lakh a month, I will require the same post retirement adjusted for inflation'. Planning for retirement is one of the most difficult tasks, since using the right inflation measure for the same is very challenging.
A lot of people wish to provide for a higher cost of living during retirement citing rising medical costs. But in reality, this may not be the case. Most working professionals, those who are in the middle to senior-level management levels, prefer to be treated at large-format hospitals, where the medical attendance cost is relatively higher. These professionals are typically covered under a good group-medical coverage plan by their employer and most of the medical costs are taken care of by the health insurance policy. Post retirement, with no company-provided medical cover available, an individual may not want to be treated in a big hospital as then they would have to bear the medical expenses themselves. Thus, providing for higher medical costs for retirement, based on the above case, may actually mislead the individual to provide for a very high retirement corpus. This may sometimes be daunting to achieve.
Even if the government tames rising prices remember that SLI based inflation is here to stay.
LIFESTYLE DEPENDS ON:
- An individual's life stage, confidence in financial position, emotional values
- Natural progress in career
- Desire to achieve objectives that one was unable to achieve in the past
- Confidence arising from improvement in the country's economy, job market
- Retirement which automatically takes away a lot of benefits, perks
The author is a chartered accountant