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Financial Impact of Lifestyle Inflation

Understanding how lifestyle choices affect your long-term financial health

"When your income grows but your peace doesn’t, that’s not progress — it’s just inflation in disguise."

Lifestyle upgrades feel like success, but often they're just wealth changing hands - from you to someone else.

Real-Life Case Study: Rajesh vs Kiran

Let's take two colleagues who start with the same salary but make very different lifestyle choices.

Parameter Rajesh (Controlled Lifestyle) Kiran (Lifestyle Inflation)
Starting Salary ₹ 50,000/month ₹ 50,000/month
Annual Salary Growth 10% 10%
Annual Expense Growth 4% 12%
Initial Monthly Expense ₹ 35,000 ₹ 35,000
Monthly Saving (Year 1) ₹ 15,000 ₹ 15,000
Investment Return 10% per annum 10% per annum
Duration 15 years 15 years

Now, let's see the hidden math at work.

Step-by-Step Calculation

Year 1: Initial Savings

Both save ₹ 15,000 per month = ₹ 1,80,000 per year.

Over 15 Years: Expense Growth

Future Value (FV) = PMT × (1 + r)^n

Rajesh's expenses rise modestly at 4% per year:

After 15 years = ₹ 63,000/month

FV = 35,000 × (1 + 0.04)^15

(1.04)^15 = 1.8009

FV = 35,000 × 1.8009 = ₹ 63,031.5

Kiran's expenses rise faster at 12% per year:

After 15 years = ₹ 1,92,000/month

FV = 35,000 × (1 + 0.12)^15

(1.12)^15 = 5.4736

FV = 35,000 × 5.4736 = ₹ 191,576

Both incomes rose 10% per year:

After 15 years = ₹ 2,09,000/month

FV = 50,000 × (1 + 0.10)^15

(1.10)^15 = 4.177

FV = 50,000 × 4.177 = ₹ 2,08,850

Savings Trend After 15 Years

Rajesh's final saving = ₹ 2,09,000 − ₹ 63,000 = ₹ 1,46,000/month

Kiran's final saving = ₹ 2,09,000 − ₹ 1,92,000 = ₹ 17,000/month

Cumulative Investment Value

Both invested their monthly savings at 10% annual return.

Average Monthly Savings

Rajesh: (15,000 + 1,46,000)/2 = ₹ 80,500/month (approx.)

Kiran: (15,000 + 17,000)/2 = ₹ 16,000/month (approx.)

FV = PMT × [(1 + r)^n - 1] / r

Where: PMT = monthly savings, r = 10% ÷ 12 = 0.0083333, n = 15 × 12 = 180 months

(1 + 0.0083333)^180 = 4.505

[(1 + r)^n - 1] / r = (4.505 - 1) / 0.0083333 = 420.6

Rajesh's Investment Value
₹ 3.39 Crore

FV = 80,500 × 420.6 = ₹ 3,38,58,300

Kiran's Investment Value
₹ 67.3 Lakh

FV = 16,000 × 420.6 = ₹ 67,29,600

Wealth Difference
₹ 2.71 Crore

Rajesh is richer by ₹ 2.71 crore purely due to disciplined savings!

Key Takeaways & Smart Financial Practices

Every time you upgrade your lifestyle, ask:
"Will this expense help me earn or grow - or just look richer?"

Because every EMI you add today is a goal you delay tomorrow.

Smart Financial Practice

  • As your income rises, keep your expense growth ≤ 50% of your income growth.
  • For example: if income rises 10%, limit expense rise to 5%.
  • Direct the difference automatically to systematic investments (SIPs, recurring deposits, etc.) before lifestyle catches up.
  • (This is called "Reverse Inflation Hedging")

The rich grow their assets, the rest grow their lifestyle.
The car, phone, and house may age - but disciplined wealth only appreciates.