If you don't buy the iPhone 14 Pro Max, investing the 30 million VND you invested through compound interest will yield you over 520 million VND after 30 years.
Lifestyle inflation refers to the phenomenon where an individual's spending and standard of living increase proportionally with their income. As people earn more money, they often find themselves succumbing to the temptation of living beyond their means, leading to a cycle of increased expenses and the risk of financial insecurity.
The temptation to live beyond one's means and income is ever-present. Frequent exposure to "the good life" content and the rise of "consumerism" on social media have normalized this inflated lifestyle.
This trend can be detrimental to an individual's financial situation because it hinders their ability to save and invest for the future. As expenses rise alongside income, individuals may struggle to meet long-term financial goals such as saving for retirement or building an emergency fund. Lifestyle inflation can significantly delay or even prevent financial freedom and independence.
It's not just ordinary consumers who fall into this trap; even professionals and personal finance planners are susceptible. Taylor Sohns, a certified financial planner in the US, once foolishly bought a Maserati Gran Turismo for weekend getaways. He always enjoyed driving it and felt a sense of accomplishment owning it, but Taylor couldn't ignore the fact that he was a certified financial planner and that the purchase was a mistake.
He reviewed his financial plan and entered the amount he would spend on the car into a spreadsheet. Taylor discovered that the money spent on the Maserati could add over $700,000 to his retirement fund, allowing him to retire 4.3 years earlier. This result was a wake-up call, prompting Taylor to re-evaluate his spending habits.
To prevent wasteful spending from derailing financial goals, Taylor Sohns and many personal finance planners have devised a simple yet highly effective process involving the use of compound interest to assess the long-term impact of purchases.
Before spending money on a product or service, everyone should apply this formula:
FV = PV x (1 + i)^n
In this formula, FV represents the future value, the amount of money you would receive if you chose to invest instead of spending it now. PV represents the present value, which is understood here as the amount you intend to spend. i is the fixed interest rate, usually 7-10% per year. n is the number of years you intend to invest, usually until retirement.
For example, you see many colleagues at your company using the iPhone 14 Pro Max. This month, after receiving a raise, you plan to use 30 million VND to buy one. If you invested that money at a 10% annual interest rate, after 30 years, you would receive over 520 million VND. By using this process, individuals can better assess whether a good or service is worth sacrificing its long-term financial growth potential.
Furthermore, we can avoid lifestyle inflation by practicing slowing down our thinking. Developing a prudent financial mindset involves cultivating restraint and mindfulness in spending. Reorienting the thinking that saving is always appealing and impactful helps combat materialism and consumerism. It encourages conscious decision-making regarding costs, considering the impact of purchases on both immediate satisfaction and long-term financial goals.
Little Gu (according to Entrepreneur )
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