- Lifestyle inflation causes spending to rise as income increases, hindering wealth building
- Salary hikes often lead to higher expenses, leaving little room for increased savings
- Rising EMIs, fixed expenses, and investing leftovers are key warning signs to monitor
A bigger salary should make it easier to build wealth. But for many working professionals, it does the opposite.
The reason is simple: lifestyle inflation.
As income rises, spending often rises with it. A better car. A bigger home. More expensive holidays. More subscriptions. More eating out.
The salary grows. So does the monthly bill. "Lifestyle inflation is one of the biggest silent threats to wealth creation among working professionals today," Rahul Banerjee, Founder & Managing Director, PGP Academy; Founder, PGP Wealth; and Financial Education & Wealth Management Expert, told NDTV.
He draws a distinction between normal inflation and lifestyle inflation. Normal inflation makes the same lifestyle more expensive over time. Lifestyle inflation happens when people also choose to make that lifestyle more expensive.
Consider someone spending Rs 50,000 a month today. If inflation averages 6 per cent, maintaining the same lifestyle could cost roughly Rs 67,000 a month after five years.
But if the person also moves into a bigger house, buys a more expensive car, travels more and increases discretionary spending, the monthly outgo could cross Rs 1 lakh.
That extra spending is not simply the result of rising prices. The lifestyle itself has changed.
The Salary-Hike Trap
A salary increase can make this problem worse. Suppose a professional gets a Rs 40,000 monthly hike. Instead of directing a large part of it towards investments, the additional income gets absorbed by a higher car EMI, upgraded holidays and new lifestyle subscriptions.
The person is earning more, but may not be saving much more. According to Banerjee, this is one of the biggest financial mistakes professionals make. "A higher salary should not be treated as permission to spend more. It should be an opportunity to build more wealth," he said.
A person whose income doubles but whose savings rate stays unchanged may appear richer without becoming significantly wealthier. That can become a problem later.
Children's education, healthcare and retirement costs can rise sharply over time. Retirement itself may last 25 to 30 years.
So, a professional earning Rs 30 lakh a year may feel financially comfortable today and still be underprepared for the future.
Three Warning Signs To Watch
Banerjee said behavioural mistakes can often cause more financial damage than a lack of investment knowledge. After training thousands of financial advisors through PGP Academy, he said he has seen people spend considerable time researching their next phone or car, while spending very little time checking whether they are actually on track for retirement.
He pointed to three warning signs:
- Rising EMIs: If every salary increment brings a bigger loan or car EMI, wealth creation can take a back seat.
- Higher fixed expenses: Bigger rent, EMIs, subscriptions and recurring bills can make it difficult to cut spending later.
- Investing what is left: Waiting until the end of the month to invest often means there is little left to put away.
Save First, Spend Later
The solution is not to stop enjoying life. It is to prevent every income increase from becoming a spending increase. Banerjee recommends reversing the usual sequence: save and invest first, then spend what remains.
The idea is straightforward. When income rises, increase investments before upgrading the lifestyle. "Lifestyle is visible; wealth is often invisible," Banerjee said.
The real measure of financial success, he added, should not be how successful a person looks today. It should be whether they have built enough financial freedom to make choices throughout their life.
