Balancing Your Budget During Inflation

Last month Americans faced a 40 year record inflation rate of 9.1%. For many this is devastating as they try to figure out how to pay for everything.

People are finding it increasingly difficult to buy your daily need items within a defined budget, it is possible that you are at the receiving end of inflation.

This led me to ask how we budget during rising inflation. Recently I spoke to Irving Wilkinson, Editor of AlphaBetaStock.com, about inflation and family budgets.

“Inflation is like an increased tax on the average American, suddenly they have to pay more for products and services. Unfortunately wages haven’t kept pace. The first thing people need to do is to get a budget and then prioritize items.”

Wilkinson continues, “We are seeing people carry more and more credit debt because people are putting the increased prices on credit. This is a huge mistake and will be a huge weight in the future.”

Experts predicted that the demand for consumer loans will increase by 47% in 2022 due to inflation.

Most people would agree that budgeting is not sexy or fun, but it is necessary. Rising inflation only increases the need for people to keep spending under control. In this article I will give tips on how to budget during inflation.

What exactly is inflation?

Prices of items are not fixed. When they rise, you have to pay more money to buy the same amount as in the past. Alternatively, if your budget is fixed, you may have to make do with a lower quantity. This rise in prices, that makes your living cost higher, is called inflation.

It has been predicted by experts that 2022 will witness a rise in prices of many products and services. Gas, food, and other household items of daily use were already up 6.8% from 2020 to 2021. While each change is small, and we may not even notice the difference in one transaction, the overall impact does add up and makes it substantial.

Prices are not all that is impacted by inflation. Interest rates may also be affected, creating a long-term impact on your savings and earnings. It could also have a psychological impact and make you more careful about the money you are spending.

But help is at hand. There are techniques which can help you cope with rising prices and lead a reasonably normal life by adjusting your budget and spending habits.

Budgetary adjustment

A review of your spending habits is usually a good starting point. Some items might stand out on their own as consuming an excessively high portion of the budget. These are the low-hanging fruit that can be plucked without much impact on your lifestyle.

Start Tracking

Mindfulness forms an important part of this effort, and starts with the tracking of expenses. After the obvious ones have been eliminated, you need to make an effort to identify the ones which could be classified as needless or excessive.

Do you have memberships that are not used? Stop them. It has been reported that on an average, Americans pay #347.81 annually on memberships that are never used. Are there things you are buying that are not used and eventually find their way to the bin? Stop buying them.

Substitute

Try looking for substitutes that are less expensive. It is estimated that buying generic grocery products instead of branded ones can shave almost 30% off the bill.

People who use this strategy say that there is little difference in taste and quality between the two. But you judge for yourself. Make the effort to compare and then decide.

Buy in Bulk

Buying in bulk is a known strategy for economization. Buy in bulk when you can. The other beneficial side-effect of buying in bulk is that you will need to make less trips to the store and save on fuel in the bargain.

Of course, households will also need to take into account other considerations like storage space and availability of money to buy in bulk.

Reduce Debt Interest

Regular servicing of debt can save a packet. This will minimize your interest cost, which is usually high on consumer loans, especially for borrowers not paying on time. At the same time, it will improve your credit rating, making you eligible for cheaper loans in future.

Inflation could also make it more difficult to service your loans. If you cannot service all your loans, servicing them in order of cost is recommended.

While you should check the impact of delayed payments for each type of loan, in general credit card borrowings work out very expensive. This is also known as debt consolidation where you roll up your debt into the lowest cost outstanding, if there is room in it.

Lifestyle Changes

Lifestyle adjustments may also need to be looked into. Using less energy would be a good place to start, especially since utility prices are also increasing. Lower your thermostat to save on heating cost, especially during times the house is not occupied.

Look at investing into small home improvements that will save you much more money over a period of time. Heating a smaller space will cost less than heating a larger one.

Bonus Tip – Invest smartly

While being smart on expenses is the obvious response to inflation, you also need to be smart about stretching your dollar through investments in the right products. Series I Savings Bonds are designed to protect you from inflation. Interest rates are adjusted to keep pace with inflation. 

An individual can only purchase up to $10K of them in a year, and only from the TreasuryDirect.gov website, with an additional $5K out of your tax refund money. They are also exempt from local and state income tax, pushing the yield up even higher.

In conclusion

Along with being mindful of your spending habits, it always helps to know your financial priorities. It will enable you to make the right choice when needed. 

While these suggestions might make the path easier, it should be understood that willingness to make adjustments as well as flexibility will be needed to tide over such situations. 

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