As our investing journey matures and the positive experiences get accumulated with time, there is a feeling of confidence that wealth creation is really on its way. This confidence can sometimes lead us to think that even affordability has been renewed.
It’s easy to accept this because spending more is fun. Upgrading your car or even your handbag can be an exhilarating experience which we want to keep repeating. The excitement of having created a growing pile of investments can sometimes be a lure to inching up spending too. It causes a certain feeling of being wealthy which manifests in choosing overseas holidays immediately over local tours or picking branded sandals which cost three times more than your regular pair.
There is nothing wrong with spending your hard-earned money. Through the right investments, we put our money to work so it can create wealth and when that happens, naturally, we want to use that wealth to upgrade our lifestyle.
The only thing you must ensure is that the lifestyle upgrade doesn’t come at the cost your future financial security and also that you are not keeping yourself deep in debt while spending frivolously. Before signing up for that lifestyle upgrade do these two things.
Move towards clearing up large debt
You may or may not get completely debt-free, but if 40%-50% of your monthly income goes into repaying one or many loans then you have to consider reducing that burden before upgrading lifestyle. It doesn’t mean you have to grow your investments to a point where you are able to repay the entire loan. What you should try to do is utilise your investment gains from time to time to prepay some lump sum amount and reduce your monthly instalment. This is not a one-time effort, rather it will take a few years before you get to a point of only 15%-20% of your income going towards the loan repayment.
In the meantime, even though you may not be able to do a drastic upgrade, you can still increase your entertainment budget by a lower proportion and also enjoy the gains you are clocking in. Of course, be careful to continue to reinvest a major portion of these gains each year, so that you remain on track with your investment growth and wealth creation.
Secure your retirement kitty
Secondly, you must ensure that you have accumulated investments which are growing at a rate that is enough to cater to your expected retirement expenses. You will keep adding to this pot but also remember that as you keep upgrading your lifestyle and getting used to it, your expected retirement expenses will shift upwards too.
Not only do you have to consider accumulating a large pool of investments that is directly catering to your retirement and try not to break that pool under any circumstance. But also, incrementally your contributions to this pool should keep increasing. Once again begin with small steps towards that lifestyle upgrade and keep your big steps for retirement and debt repayment. Once the latter two are better off, then you start increasing your pace of lifestyle upgrade.
Most of us assume that over time, income will only rise and not fall. However, today’s reality is hugely divergent from this trend which was intact until a decade ago. When you hit the hard times, selling that upgraded car in a second-hand car market will not fetch you nearly as much as what you could have earned by investing that extra money you used to buy the car. The designer handbag too will yield you very little when income is no longer regular.