Budgeting & Saving
If you’re concerned about how to budget for inflation, you’re not alone. Inflation occurs when there is a general increase in the price of goods and services. This leads to a fall in the purchasing power of money and can make handling everyday expenses a little more difficult for some families. We’ll review some ways you can budget for inflation and experience peace of mind in an economy of higher prices.
Why do I need to budget for inflation?
Maintaining a budget during periods of high inflation could be critical to making ends meet. A budget can show where inflation is hitting you the hardest and may help you identify areas where you can make cutbacks and adjustments.
Budgets can help create a system of order that manages expenses when the economy becomes somewhat unpredictable. And you have some options when it comes to determining which one will work for you. One popular method of adjusting for inflation is called “zero-based budgeting.” With this method, you allocate all of your money to expenses, savings, and debt repayment. The end goal is that your income minus your expenditures equals zero by the month’s end.
You can repeat expense categories and amounts every month or change them up. If you come in under budget in a specific category at the end of the month, add the remaining amount to next month’s budget. Or you can move it to another category, such as your emergency fund. It’s a similar concept as the “envelope system,” made popular by financial guru Dave Ramsey. This involves distributing money for different expense categories into envelopes.
How should you adjust your budget during inflation?
Carefully look at your recent spending
Start with assessing how much you are spending each month in different categories. Pull up your bank statements and credit card statements (either digitally or manually), and cross-reference this month’s expenses with the previous 3-5 months to see how those numbers have changed. Remember that you may have unexpected budgetary outliers like car repairs or medical expenses.
Find any problem areas
Subtract last month’s total expenses from one category from the same category two months ago, taking note of the difference. Let’s use grocery spending as an example. If you spent $300 on food/groceries in April, then $350 in May, you’d have a $50 increase. To find the percentage increase, you would divide that $50 increase by the starting point, or $300, and come up with a 16.6% increase from April to May. That’s a pretty big jump. While inflation is likely to be a contributing factor, some personal factors also might have come into play.
Financial discipline is critical when the economy becomes volatile. It’s the time to make cuts to those impulse buys and “treats” that you previously justified. Develop a spending plan for everyday purchases and stick to it.
Adjust your budget in areas hit by inflation
The benefit of having a budget is that you don’t have to guess where your money is going and how much you need to cut in response to changing circumstances. The first task when you’re trying to make smart financial decisions is addressing the categories that are most vulnerable to inflation.
Food
For some, rising food costs could be handled by eating fewer dinners at restaurants. For others, it may mean using coupons when grocery shopping or only buying meat on special occasions. Some people may try comparison shopping, where they meticulously choose to shop at a grocery store with lower prices. No matter how you try to save money to combat inflation, following a grocery budget is an excellent place to start.
Gasoline
Gasoline, and fuel in general, is one of the industries hardest hit by inflation and the result is rising gas prices. To fight inflation costs with transportation adjustments, be more conscious of how you’re using fuel. For example, you could begin carpooling to work or using public transportation when available. When running errands, find the most fuel-efficient route and travel when traffic is least congested.
Adjustable-rate mortgages
Another trouble spot to address is the cost of living for housing, particularly adjustable-rate mortgages (ARMs). This means the annual interest rate on a home loan can shift with inflation — whether it’s every five years, one year, or even monthly — depending on the kind of ARM chosen. Borrowers can get into hot water if their monthly payments jump suddenly as interest rates increase with inflation. The best way to stay on top of this is to keep a close eye on the market, understand how your ARM works, and appropriately budget for any upcoming adjustments to interest rates.
Balance the deficit by cutting out luxuries and waste
When finances get tighter and you’ve taken a look at overall spending, it could be time to cut unnecessary expenses. No one likes this part of adjusting to inflation. Amateur advisors may advise that you should “just get rid of any expenses you don’t need.” But that’s impractical advice due to the variety of ways people spend money. What do you really need to get rid of? It will be different for every person. These are suggestions for some areas to consider when you’re looking to make cuts:
Subscription services
Subscriptions are an easy way for money to go down the drain because of their automatic renewal. Subscribers can go for months not using a service without realizing they’re still paying for it. These apps, programs, and services are intentionally crafted to make automatic payments easy. Look for these in your credit card bills, bank statements, or receipts from app stores. If you don’t absolutely need it or rarely use it, it may be time to cancel it.
Impulse spending
We all know the spending traps we can fall into. For some, the trap is set with aimlessly browsing the aisles of a discount store and asking, “How did I spend $150 when I came here for a pair of socks?” For others, it’s grabbing lunch with co-workers because “everyone’s coming” while your packed lunch sits in the office refrigerator. When inflation hits hardest, it’s critical to look at the kinds of consumer goods that are luxuries vs. necessities. Yes, the time you spend browsing the aisles at TJ Maxx may feel like self-care, but saving that money and finding cheaper ways to have fun will ultimately be healthier for your long-term well-being.
Entertainment
Entertainment is an incredibly broad category. Entertainment can mean movie tickets, streaming services, sports games, a cable bill with thousands of channels, or unlimited phone data. This is one of the best places to start when making cuts. If we learned anything from a pandemic, it’s how to keep ourselves entertained without traveling far from home.
You could skip TopGolf and pull out the Wii for an old-school Wii golf tournament or a board game night. Instead of going to the movies, look through your old DVD collection and watch one of the old, timeless classics. It may be a difficult adjustment at first. When you reduce spending because of rising costs, it comes with some tough decisions. You never know – you might enjoy some of the lower-cost entertainment more than you’d expect.
Utility bills
Utilities are an inevitable monthly expense. As your budget tightens and you opt to stay home, you may experience an increase in your utility bill. You could offset this with more conscious decisions about energy, water, and natural gas use. Start by turning off any lights in any room you’re not in and taking shorter showers. You can also unplug any electronics that aren’t currently in use. These things may seem small, but the savings will add up, especially with rising prices in other categories.
Other ways to combat inflation
Consider adding income
Making more money may not be the easiest route, and it may not be a viable option for everyone. Working parents are particularly hard-pressed for extra hours in the day. But if you have spare time or energy, an extra source of income, however small, could make a difference. This may mean driving for a vehicle rideshare company or delivering food. Many part-time jobs offer flexible hours and a schedule you can craft to fit your own. Extra cash, no matter how you use it within your budget, is always helpful.
Debt consolidation
A debt consolidation loan is one way you could start gaining financial security in the midst of inflation. You may have multiple debts from loans with high interest rates that you’re paying off. Debt consolidation loans could help you find better interest rates for paying off that debt.
Credit card refinancing
Credit card refinancing could help you pay off multiple debts and lower your interest rate. Some consumers consolidate debt by using a balance transfer offer from another credit card. Those credit card accounts come with low introductory interest rates, but those rates increase after a set period of time. A good budget could help someone figure out whether they can pay off the balance before the introductory rate ends and, if not, what the higher rate will do to their expenses.
How to budget for inflation
With unprecedented fluctuations in the global market, it’s easy to get bogged down by the weight of debt. BestEgg can help you find financial freedom, even in the midst of inflation. Once you’ve managed your debt, your budget and personal finance decisions could become much easier to navigate and adjust.
Further reading:
Personal Loans vs. Credit Cards for Debt Consolidation
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
