Home' Trinidad and Tobago Guardian : June 21st 2015 Contents 4SBG PERSONAL FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JUNE 21 • 2015
Jennifer is a 25-year-old grad-
uate of the University of the
West Indies. Unlike many of
her classmates, she was able
to get a job right out of school
as a speechwriter at a gov-
ernment ministry paying
$11,000 per month. This is
her first job. For the previous three years, Jen-
nifer s tuition was met by the GATE pro-
gramme. However, she was still solely respon-
sible for her living expenses over the period.
To make sure she had enough to cover rent,
groceries, books and photocopies, Jennifer
worked part time at one of the campus cafe-
terias. The stipend of $2,000 paid her bills,
but left little over for extras and she had to
learn to budget her limited funds.
In her mind, the new job puts an end to all
of that. She has worked hard and has been
rewarded. Finally, she can afford all the things
she has had to forego buying because of her
Fast forward to one year later.
Jennifer no longer packs lunches at home,
but purchases at least two of her daily meals.
She has also acquired an impressive wardrobe
and is a regular on the Avenue on Friday and
Even though her relatives live close to her
workplace, Jennifer chooses to rent an apart-
ment, which has Internet, cable and is fur-
nished with goods bought on a hire-purchase
Jennifer wants to be able to buy a car, get
married, buy a home and possibly go back to
school for graduate studies. But she isn t saving
for any of these goals. She doesn t have any-
thing left at the end of most months.
But this is not a situation limited to the
Tim and Gina are a married professional
couple living in an new, upscale gated com-
munity. The move from their rented apartment
was financed by a promotion at Tim s job,
complete with increased salary and benefits
and wise financial management of the family s
money on Gina s part.
They are happy with their new home and
see it as the culmination of all their hard work
The problem is they are feeling a certain
amount of pressure to "fit in" in their new
circumstances. Two-car families are common
in the neighbourhood. Tim and Gina currently
share their seven-year-old car, a respectable
brand, but not one commonly seen there.
Their children do not attend the private schools
that their new friends do. Their neighbours
entertain regularly and expect Tim and Gina
to reciprocate. Foreign family vacations are
Gradually, the couple sees their manageable
monthly expenses climb as they try to keep
What is happening to Jennifer, Tim and
Gina? Chances are, they have fallen victim
to lifestyle inflation. The Sunday BG asked
IAN NARINE, investment adviser and
financial consultant, to help our readers
understand what lifestyle inflation is and
how they can avoid it.
Sunday BG: What is lifestyle inflation?
Ian Narine: Most people are concerned about
financial risk but very often their focus is on
risks that they cannot control. We are worried
about the state of the economy, about changes
in interest rates and about whether stock prices
will fall. Yet the one risk, quite possibly the
biggest risk that people face, is the risk to
changes in lifestyle. Inflation is an increase
over the prior period and lifestyle inflation is
simply increasing your lifestyle tastes over
In simple terms, it is about driving that
entry-level car today, but having a desire for
the BMW tomorrow. As you begin to earn
more, your pursuit of the finer things leaves
you with less money, even at a higher salary.
If your lifestyle is increasing faster than your
paycheck then you will have a problem. It is
the one financial risk that we have almost
total control over.
I suspect the issues of discretionary
income versus disposable income will
become important here. Could you
explain the difference?
Quite simply the salary you get after deduct-
ing all taxes is your disposable income.
From your disposable income you assess
your spending on needs and wants. After you
have satisfied your needs, the rest is called
your discretionary income. Most people mix
up needs with wants. Think in terms of gro-
ceries. The basics that you need to satisfy your
dietary needs are not to be confused with
additional expenditure to meet with more
expansive culinary tastes.
In your opinion, why are people sus-
ceptible to lifestyle inflation?
There are many reasons why people make
themselves victims of lifestyle inflation. Very
often it is simply keeping up with the Joneses.
Moving into a neighbourhood that you can
hardly afford puts you on a slippery slope
where you have to adjust to the lifestyle of
your neighbors thus placing you under increas-
ing financial strain.
On a smaller scale, you may begin to splurge
on Fridays after a hard week of work and over
time you may require a bigger "fix" in order
to feel that sense of reward.
In other instances, it comes down to a lack
of will power as the lure of advertising pulls
you into items that you don t need.
What are the signs that you may be having
a problem with lifestyle inflation? If you find
that even after changing jobs for higher
salaries, promotions or bonuses you still end
up in basically the same financial position at
the end of a year then your lifestyle has inflated
instead of your savings.
It gets really dangerous when you are bor-
rowing to fund this lifestyle especially when
your borrowing is to spend on wants as
opposed to the acquisition of appreciating
assets. Borrowing to go on a vacation is a
fairly common example.
What are the solutions to lifestyle infla-
The simplest solution is to budget and then
to keep track of your expenses. Personally, I
use an App called "Expense" and this easily
allows me to track every item of expenditure
in real time. It takes all of five seconds to do,
often while you are waiting for the cashier to
process your payment.
What it does is allow you to track your
expenses and makes you accountable to your-
self. You can t lie on your own budget.
Another simple solution is, as best as you
can, pay with cash. Especially if it is for a
luxury item. The act of taking physical cash
and handing it over for something you know
you don t need creates a sense of "pain" in
your brain. That sensation is absent when
you use a credit card and comes about when
you get your statement. By then it is too late.
Try it for yourself and you will understand
Bottom line, pay yourself first and set that
money aside for tomorrow. If you do have to
spend, think of that expenditure in terms of
something more tangible. When you start to
look at things in terms of relative value you
can determine if it is really worth it.
How many hours of work would you require
to pay for that weekend lime or that new
Another example, a pair of tickets for a
couple Carnival fetes might equal the cost of
a tablet or smart phone. The latter may be
with you for a couple years. If you get a greater
level of utility from Carnival then it s your
deliberate choice. However, if you are doing
it to keep up with the crowd, you will quickly
run into problems.
As a investment adviser, how would
you advise persons to allocate the extra
money from salary increases?
The best way out of a hole is to first of all
stop digging. In this context, whenever you
get a salary increase or some amount of back-
pay or bonus, immediately set those funds
aside as savings or pay down debt. Put it into
a separate account.
Once you have no sight of those funds, the
temptation to spend them is reduced. You
can then continue to live with the same
lifestyle as before.
The next step is to try to reduce expenses
and it is best to do so gradually over time.
If every month you reduce your expenses by
one per cent over the previous month then
after 12 months you would have cut them by
12 per cent. If you add a salary increase or
a bonus to that then you are well on your
way to building a nest egg for retirement,
because that s when you would really need
Help! It costs more to be me
Lifestyle inflation Q&A explores what you can do about it
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