In the recent past, thousands of people have been laid off due to economic uncertainty and a loss of business. The scenario challenges individuals on a personal level. In this context, lifestyle inflation caused by a recession can disrupt the balance between income and expenses for individuals.
There are chances of a recession across markets. Recession may lead to things spiralling out of control. A period of economic decline or recession characterises a decrease in the gross domestic product (GDP), rising unemployment rates, and declining consumer spending. It means that people may have less disposable income to spend on non-essential items.
The correlation between lifestyle inflation and recession
Income and expenditure are positively correlated. Lifestyle inflation refers to the phenomenon of spending more as one’s income increases. One must have noticed with every income raise, personal expenditure also increases immediately in proportion depending on the life stages, etc.
If not managed properly, the tendency can make it difficult to get out of debt, save for retirement, or meet other big financial goals. When things go out of hand, it forces people into a cycle of living from payday to payday. In such a scenario, the affected person has just enough money, or even less, to pay his monthly bills.
Hence, inflation can make matters worse! It can lead to a further reduction in purchasing power. As prices of goods and services increase, you may have to cut back on spending even further to make ends meet.
If, over the years, one has upgraded his lifestyle proportionate to a rise in income, chances are that he may struggle to keep up with it during recessionary times. Apart from financial troubles, the situation may trigger social and emotional repercussions too.
A forced downgrade in lifestyle may often lead to anxiety about the future. The inability to service the loans may also dent personal credit records. However, the good news is that, unlike inflation, one can control lifestyle inflation.
Strategies to temper lifestyle inflation
While lifestyle inflation is inevitable, managing the personal expense-income equation will help deal with it during the recession. Here are some solutions:
Track expenditure and savings: It is essential that the person tracks expenses and savings. It will help him identify areas where one can cut back on spending and save money. By tracking expenses, individuals can create a budget and prioritise their spending to ensure that they have enough money to cover their essential expenses. Additionally, tracking savings helps individuals stay on top of their finances and ensure that they are saving enough to weather a potential economic downturn.
Set priorities: To recession-proof your lifestyle, prioritise essential expenses such as housing, food, and healthcare, and create a flexible framework for non-essential expenses such as entertainment and travel. One way to control non-essential expenditure is to limit it to a certain percentage of your income. In some cases, one may have to make sacrifices and temporarily suspend spending on luxuries and entertainment to make ends meet. If a large proportion of the income goes into servicing debt incurred for maintaining a lifestyle, one may also consider going on a ‘lifestyle diet’ to restore parity.
Create a contingency fund: Another strategy is to build an emergency fund with a savings account designated for unexpected expenses such as job loss or medical emergencies. Ideally, an emergency fund should contain enough money to cover three to six months of essential expenses.
Invest in yourself: Investing in yourself is another way to prepare for a potential economic downturn. Invest in education, skills development, and networking. By improving skills and knowledge, one can make himself more valuable in the job market. Skills upgrade increases your chances of employment or advancement. Also, when the going is good, one must invest in insurance products to secure oneself and his family against financial repercussions due to an untoward incident.
Lifestyle inflation is a reality, and it can be challenging to drastically ‘deflate’ one’s living standards when a recession strikes. Staying prepared, having a financial goal, and following a strategy to manage the expense-income equation will hold the person in good stead. These steps can help manage lifestyle inflation and face unimaginable challenges during a recession. Long-term planning should begin with a simple step: Asking yourself if you are recession-proof.