Most, if not all Filipino workers receive salary increases if they stay with a company long enough, and this was true even after the virus hit. While 28% of all businesses had to freeze the pay of their employees a year into the pandemic, the rest were able to give an average wage hike of 5.5%.
So why aren’t there more households with savings, emergency funds, or insurance policies? In other words, why aren’t we better prepared for the future?
The most common culprit is something called lifestyle inflation.
How does it happen? And more importantly, how can you prevent it from happening to you? Before we get to this, let us first take a closer look at what lifestyle inflation is.
What is Lifestyle Inflation?
Most Filipinos who get their hands on more money automatically think that they can finally buy the latest smartphone, upgrade their gym membership, or get a brand new car.
In other words, the first thought is to spend money instead of saving it. What is worse, the additional expenses are usually higher than the increase in income.
Between this elevated lifestyle and the rising costs of commodities, most Filipinos end up with zero savings even if they earn more.
Sounds familiar, right? That is because you have probably experienced it personally or witnessed someone close to you go through it.
Why Does Lifestyle Inflation Happen?
While lifestyle inflation is a common occurrence among Filipinos, the reason behind it is a bit varied.
Newly-Found Financial Freedom
For younger people who are only starting to experience financial freedom, a paycheck allows them to buy things that they could not buy for themselves before.
As a result, things that they thought were luxuries when they were still at school become necessities once they start earning money.
Here’s a common example:
Before, taking vacations on a shoestring budget was fun. Now that they have a job, it becomes important for them to go on expensive vacations every few months.
We’re all guilty of this at one point or another, that is why it is important to be mindful at all times.
A Better Life for Loved Ones
Older people with their own families are not immune to lifestyle inflation.
Parents have the tendency to want the best things for their kids, from transferring them to the most expensive schools to buying the latest iPad models for them. When a neighbor or a friend renovates their kitchen, most people would want that for themselves too.
A Common Pitfall for Filipino Families
These behaviors are normal and are part of human nature. They are even necessary sometimes, like when you have to invest in more expensive clothes to look presentable to clients.
In short, the line between practical and foolish spending is not always clear, and that is why most Filipinos fall victim to lifestyle inflation.
Still, while it is difficult to go against your instinct to spend more when you earn more, it is not impossible. There are ways to pamper yourself and your family without neglecting your future.
What Are the Tips On How to Prevent Lifestyle Inflation?
If you do not want to live from paycheck to paycheck, you must be better at managing your money. Work towards financial independence by setting a limit on your spendings and savings.
Take Into Account the Impact of Taxes
While your increase might seem substantial at first, keep in mind that it is taxable. Try to find out what your net increase is. Once you know this, you will have a better idea of how much more money you can expect.
Source: Pexels
Automate Your Savings
When your savings start to increase, your urge to spend increases too. Resist this temptation by automating your savings.
Most banks offer online transactions that you can set up, so part of your money goes to an investment periodically.
Make Small Lifestyle Changes
As much as possible, do not make big purchases in the first few months or even the first year after your increase.
Remember that if you buy a more expensive car, it would require a more expensive mechanic. If you extend your house, it would require more maintenance moving forward.
Celebrate your promotion or increase, but do it in moderation.
Invest in Various Insurance Products
Even before getting a promotion or increase, you should talk to a financial expert to discuss your future. Financial specialists can help you choose the best insurance products based on your life goals.
You can take your pick from retirement, health, education, wellness, or some other forms of investment.
What Is the True Cost of Lifestyle Inflation?
As mentioned before, lifestyle inflation is not always obvious.
Here’s another example:
After getting an increase, you might decide to upgrade your internet connection, adding around PHP 500 to your monthly expenses, which is reasonable. You might also take an unplanned vacation with your friends or family to celebrate.
Before you know it, you are already spending more than your pay hike.
To illustrate, say your salary is at PHP 30,000, which is much higher than the average of PHP 15,000. A 6% increase means you get PHP 1,260 more every month after taxes of around 30%.
- Increase of PHP 1,260
- Additional cost of internet connection: PHP 500
- Vacation expenses: PHP 50,000
- PHP 50,000/(PHP 1,260 – PHP 500) = 66 payments
First, a big chunk of your increase already goes to the upgraded internet connection alone.
Second, while the vacation is a one-off expense, you would spend the next 66 months paying for it with what remains of your pay increase.
Preparing for the Future
Lifestyle inflation is hard to recognize, much less prevent. However, it is something that you must overcome if you want to secure your future.
If you want to learn about different ways to manage your finances properly or earn additional income by being a financial advisor, get in touch with Ms. Sheila Ong by clicking this link.