Have you accounted for Lifestyle Inflation?

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Greetings from PenguWIN:

On analysing the portfolios of large number of investors, I find that that once they start their Systematic Investments (SIPs, STPs) to build a corpus, with or without specific goals, there is a tendency to feel that their personal finance is in place. Specifically, when SIPs are started in equity funds, investors feel that it’s the universal panacea for all their financial needs.

Let me explain it further with an anecdote. Vikram, aged 25, is a fresher in software field, with a monthly salary of Rs. 35,000. He is keen to buy a Maruti Swift that costs about 7 lakhs. He does not want to take a car loan and wants to fund it by accumulating a corpus through equity funds, with a 5-year time period in mind. He shortlists 2 funds to start SIPs worth 6000/- using an online SIP planner (there is no dearth of such tools today). Vikram pursues this goal meticulously and accumulates the money required in 4.5 years (thanks to the favourable market condition), 6 months ahead of his planned date.

His salary has grown over a period of time to over a lakh/month and he manages a team in his organization. He is happy that he has achieved his first milestone of buying a big-ticket item. When he shares this news with his peers and friends, they don’t seem to be excited like him and few tell him candidly that he should to buying a 10 lakhs+ Car (Honda City, Verna,  Vento) or atleast a compact sedan (Amaze, Ameo, Dzire), if he is not comfortable with a 10L+ car. Vikram is upset that his first major accomplishment has become insipid. 

Another person Veda, buys a 2BHK apartment, without sizing it properly or not thinking atleast 10 years ahead (happens to many of us). He repents later that his house is a atleast a room short, as he had planned it based on his financial situation (affordability), early in his career. When he can afford, the prices have already skyrocketed and you can’t just pay an incremental amount for the 3rd bedroom, unless you own an independent house, which is becoming rarity

So, what went wrong in Vikram and Veda’s case?

Both Vikram and Veda did not factor in Lifestyle Inflation or what becomes necessities at a later point in time.

<Blog # PenguWIN 1067– Have you Accounted for LifeStyle Inflation>

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