Friday, January 22, 2010

Living Standard @ Personal Finance Level

Like inflation, Living Standard can be a big number where GDP, poverty rate, income growth inequality, life expectancy are involved. But as far as personal finance is concern, what you should really care is your very own personal living standard.

Simply put, living standard is your ability to sustain how you live your life. At one hand this can be calculated very much similar to Living Cost and the increase of living cost over time is inflation. So is living standard the same as inflation ?

But it should be the opposite instead. One would want lower inflation but higher living standard. So what has gone wrong in the formula ?

The keyword is "ability". If you are NO longer ABLE to sustain how you live your life when inflation kicks in, you are facing the risk of lower living standard. Inflation is an external factor. Your ability to fight the inflation will determine your living standard. When your ability increases faster than inflation, your living standard is raised.

Most of the time, this ability is associated to income. The more money you get the less you need to worry about how expensive the stuff has become. Although vastly applicable but earning income is NOT the only ability one can have.

Says the food and rent have been increasing rapidly. You have to rent a smaller place and eat at cheaper places. You change your lifestyle, you are having a lower living standard now.

On the other hand, another guy is facing the same inflation challenge. Instead of moving to a smaller place, now he rent a bigger place and sublet it to collect higher rent. He starts to grow his own food at his spare time. He changes his lifestyle, but he is having a higher living standard now - staying in bigger place while paying the lower rent and eating healthier food.

Which of the above is living cheaply and which one is living frugally ?

Sometimes creativity and innovation plays a vital role in achieving higher living standard, both in generating higher income and also how one can live his life.