What is the Money Illusion?

The Money Illusion is a cognitive bias where people view their wealth in nominal terms (current rupees) rather than real terms (purchasing power). You feel richer because your salary went up, but you ignore that prices went up faster.

Why does a ₹1 Lakh salary feel insufficient now?

Due to lifestyle inflation (rising costs of private schools, healthcare, and housing) and general CPI inflation, a ₹1 Lakh salary in 2026 has the purchasing power of roughly ₹45,000 in 2010. The number looks big, but the value is low.

How much should I save to be actually rich?

True wealth is defined by your savings rate, not your spending rate. Financial planners recommend saving at least 30-40% of your income and investing it in assets that beat inflation (like Equity Mutual Funds) to build real wealth.

The Money Illusion in India: Why Higher Salaries Don’t Mean More Wealth

The Money Illusion is the tendency to view wealth in nominal terms (salary numbers) rather than real terms (purchasing power). While Indian salaries have risen, lifestyle costs—education, housing, and healthcare—have risen faster, leaving the middle class with a shrinking real surplus.

Who this guide is for: The aspiring Indian middle class—earning between ₹10L to ₹30L—who feel like they earn a lot but save very little.

"I earn double what my father earned at my age, but I feel half as secure."

This is the defining sentiment of modern India. We see flashy cars, crowded malls, and expensive vacations on Instagram. The GDP numbers look great. But look closer at your own bank balance at the end of the month. Where does the money go?

The answer lies in a dangerous economic trap called The Money Illusion — a direct consequence of inflation silently destroying purchasing power while incomes rise only on paper.

1. The ₹1 Lakh Salary Trap

A decade ago, a salary of ₹1 Lakh per month was a badge of wealth. It meant luxury. Today, in a metro city like Mumbai, Bangalore, or Delhi, ₹1 Lakh is the new "survival" threshold for a family of four.

Why? Because while the number on your paycheck grew, the value of that money shrank faster than you realized.

Check Your Real Salary

Does your current salary have the same power as your starting salary 10 years ago?

Calculate Real Value

2. Nominal vs. Real Income (The Math)

Let's look at the data. According to income tax data and economic surveys, the average income for the tax-paying middle class has stagnated in real terms.

Year	Nominal Income (Avg)	Inflation Adjusted (Real Value in 2014 terms)	Status
2014	₹10.2 Lakhs	₹10.2 Lakhs	Baseline
2024	₹14.5 Lakhs	₹8.9 Lakhs	Poorer

The Reality: You earned 40% more on paper, but you became ~15% poorer in what you could actually buy. That is the Money Illusion. To understand how returns need to beat this, read our guide on Nominal vs Real Returns.

3. Lifestyle Inflation: The Silent Killer

The government's CPI (Consumer Price Index) inflation is roughly 5-6%. But the "Middle Class Inflation" is vastly different. The items that define a middle-class life have skyrocketed:

Education: Private school fees have risen by 150-160% in the last decade.
Healthcare: Medical inflation in India is 14%, the highest in Asia.
Housing: Real estate prices in metros have outpaced salary growth significantly.

When you get a 10% raise, but your child's school fees go up by 15% and your rent by 10%, you haven't moved forward. You've moved backward. Read more about Why Inflation is Your Biggest Enemy.

4. The Debt Illusion: Rich Lifestyle, Poor Balance Sheet

If incomes are stagnant, how is everyone buying SUVs and iPhones? The answer is Easy Debt.

India is witnessing a "consumption-led" boom fueled by EMI culture.

BNPL (Buy Now Pay Later): Encourages impulse spending on depreciating assets.
Credit Cards: Revolving credit at 40% interest is destroying wealth.
The EMI Trap: A person earning ₹80,000 often pays ₹40,000 in EMIs (Car, Phone, Home).

This creates an illusion of wealth. You look rich because you consume a lot, but your Net Worth (Assets minus Liabilities) is often zero or negative. Understanding Loan vs Investment math is critical here.

5. How to Actually Become Rich

To escape the Money Illusion, you must shift focus from "Income" to "Net Worth."

Track Real Returns: Don't just save; invest. Use the Real Return Calculator to ensure your investments beat inflation.
Avoid Lifestyle Creep: When you get a raise, invest the difference instead of upgrading your car.
Equity is Essential: FDs and Gold often barely match inflation. To grow wealth, you need Equity Mutual Funds over the long term. See Why 7% Returns Are Not Enough.

Build Real Wealth

Stop spending, start compounding. See how small SIPs create massive future wealth.

Plan Your SIP

Conclusion

Feeling rich and being rich are two different things. The former is about spending; the latter is about owning. Don't let the Money Illusion fool you. Calculate your real numbers, cut bad debt, and invest for a future that is mathematically secure, not just visually appealing.