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Five middle class habits keeping you poor
Lifestyle inflation is a silent wealth killer that affects many middle-class households. PHOTO/MICHAEL KAKUMIRIZI
What you need to know:
- Lifestyle inflation is the tendency to upgrade one’s lifestyle as income increases.
Middle-class financial situations often include a reliance on steady employment income, a focus on homeownership as a primary asset, and a balancing act between maintaining current lifestyle standards and planning for future financial security. Their approach to money management is typically marked by caution and aspiration, reflecting both the desire for stability and the hope for upward mobility. But it is never an easy task. Despite earning decent incomes, certain habits sabotage the middle class’ efforts to get ahead financially.
Falling into lifestyle inflation trap
Lifestyle inflation is a silent wealth killer that affects many middle-class households. It is revealed by the tendency to upgrade one’s lifestyle as income increases. It could be moving to a bigger apartment, or upgrading to a more luxurious car or smartphone. Sadly, these upgrades only bring short-term satisfaction and prevent individuals from leveraging their increased earnings for long-term financial growth.
By constantly increasing spending as income rises, individuals miss out on opportunities to boost savings, investments, and retirement funds. This habit can lead to a perpetual cycle of living pay cheque to paycheque, regardless of income level.
To combat lifestyle inflation, cultivate contentment with what you have and focus on the value an item brings to your life rather than its newness. Before upgrading, ask yourself if the purchase will significantly improve your quality of life or if fleeting desires drive it. Before adjusting your spending, allocate a fixed percentage of any raise or bonus directly to savings and investments. This will allow you to enjoy some lifestyle improvements while prioritising your financial future.
Procrastinate on saving, investing
Another detrimental habit is failing to plan for the future. Many people focus on meeting immediate needs and wants, overlooking the importance of long-term planning. This shortsightedness can cause inadequate preparation for retirement, a lack of emergency funds, and missed investment opportunities.
Common excuses for avoiding financial planning include feeling overwhelmed by the process, believing there is plenty of time to start later, or assuming that a steady job is enough security. These justifications ignore the opportunity costs of delayed planning such as the power of compounding gains.
To break this habit, set clear, long-term financial goals. Have a plan to include retirement savings, an emergency fund, and a diverse investment strategy. Remember, even small consistent steps can lead to significant financial security over time, and regular contributions can snowball into substantial sums over decades. For instance, investing Shs50,000 monthly at age 25 versus age 35 can result in a difference of hundreds of thousands of shillings by retirement age.
Lifestyle inflation is a silent wealth killer that affects many middle-class households. PHOTO/MICHAEL KAKUMIRIZI
Failing to track financial activities
Many people lack a comprehensive overview of their financial activities. This limited oversight often results in overspending, missed bill payments, and diminished financial awareness. Without a clear financial roadmap, making informed decisions about spending and saving becomes challenging. Tracking income and expenses provides invaluable insights into spending habits, enabling informed financial decisions. Simple tools like spreadsheets or budgeting apps can reveal spending patterns, highlight areas where you might be overspending, and help you stay aligned with your financial goals.
Overlooking budgeting
Many middle-class families resist budgeting, viewing it as restrictive or time-consuming unaware that it can hinder financial progress. Effective budgeting allows you to allocate your resources intentionally, ensuring that your spending aligns with your values and goals. It helps prevent overspending and can reduce financial stress by providing a clear plan for your money.
To create a realistic budget, track your expenses for a month to understand your spending patterns. Then, categorise your expenses and set reasonable limits for each category.
Consider using the 50/30/20 rule as a starting point: 50 percent for needs, 30 percent for wants, and 20 percent for savings and debt repayment.
Debt-driven lifestyle
Many middle-class families excessively use credit to maintain or elevate their lifestyle. Personal loans, car loans, and credit cards are often used to fund purchases that exceed financial means.
Though debt can be a helpful tool when used sensibly, overreliance on borrowed money can lead to a cycle of economic strain. Besides, the interest paid on these debts often outpaces potential investment returns, eroding wealth over time.
Live within your means. For significant purchases, consider saving up instead of turning to credit. If you are carrying high-interest debt, prioritise paying it off as quickly as possible.
The writer, Brian Bongomin is the manager business development and operations, at Enwealth Financial Services.
