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Inflation Is Shooting Prices Up - Here's How To Budget Through It | Prof. Stacy, The Money Teacher

Inflation Is Shooting Up Prices – Adjust Your Budget

As inflation reaches record highs again, many families are deepening discussions about how to deal with persistent price increases in their everyday purchases. Managing money seems to get harder every day. The last time our country has seen this level of inflation was the early 1980s, when inflation peaked at close to 15%. So, pretty much anyone under 55 years old who has lived in the U.S. has no experience with budgeting during a period of “high” inflation; this is new for most of us. However, not everyone is experiencing the effects of inflation in the same way due, in part, to the differences in lifestyle people were living before inflation rose so dramatically. 

Below, At, or Above Your Means

In general, families who live “below their means” spend less than their monthly household income on expenses, leaving room to save for financial goals. Families who live “at their means” spend all (or almost all) of their income each month on expenses, leaving little room to save but also not regularly needing debt (credit cards) to make ends meet. Families who live “above their means” spend more than their household income on expenses each month, usually using debit (or credit cards) to bridge the spending gap. As you can imagine, families in each of these spending categories will experience the current higher level of inflation differently and will likely need to take different (and, in the third case, more drastic) steps to address inflation in their weekly/monthly spending plan (budget). Ignoring it won’t make it go away, so modifications to the spending plan are the answer. But where to start?

What Goes Into A Budget?

In general, every family’s budget (or spending plan) includes some fixed expenses, some variable expenses, some “sinking funds” for larger purchases, and some longer-term investing. Fixed expenses are generally the same from month to month: rent/house payments, car payments, student loan payments, insurance, childcare/education. Fixed expenses can change over longer periods of time but are generally set for at least a while. Variable expenses, on the other hand, are usually more discretionary, and changes in an individual’s behavior in the short-term can result in immediate changes to these expenses. Variable expenses include food, dining out, entertainment, gas, gifts, vacations, and family activities. Sinking funds are savings for larger purchases like a house, car, or appliance; the timing of these purchases is usually discretionary. Long-term investing for higher education, starting a business, or retirement is usually systematic and structured: “set-it-and-forget-it.”

These distinctions are important when budgeting during an inflationary period because many “fixed” expenses may not change immediately: a rent contract fixes that monthly cost for a year, and a mortgage or car payment is fixed for many years. So, for fixed expenses, a price increase may lag inflation data by several months or more. This is good news because a household tends to spend a higher percentage of their take-home pay on shelter, transportation, education, and insurance – categories where the family may not experience immediate increases in price due to inflation. However, this can also be a double-edged sword because when the contract is renewed, several months (or more) of inflation may be assessed in one larger price increase. So, what can you do about this? Look at each of your family’s fixed expenses and determine when they will “renew” so you can anticipate the amount of the price increase at renewal and plan in advance for those increases or plan to find and use alternative/substitute products. You can’t control inflation, but you can be aware of how it will likely affect your budget when fixed costs are “renewed.” 

Having an Immediate Impact on Your Budget

On the other hand, for variable expenses, price increases related to inflation are likely to affect a household’s budget immediately. However, for these expenses, individuals can generally make behavior changes in the short-term that will also affect spending in the short-term: wearing a sweater and turning down the heat, eating out less, postponing trips, finding less expensive entertainment. While we may not want to curtail our spending in these categories, we can! How? If gas prices are increasing – join a ride-share (carpool). Instead of going out with friends, have a potluck and movie or game night at home – appropriate Covid protocols in place, of course. 

Food expense is one of the areas of their budget that many people struggle with, and with rising inflation, I looked to the food industry for some suggestions to reduce the food budget because, while American families may have a love-hate relationship with the food budget, successful chefs and restaurant owners have mastered controlling food costs and minimizing waste. First, meal planning is critical to planning your shopping and minimizing overall food waste. There are many apps, blogs, and Pinterest sites that provide meal planning strategies for various diets: vegetarian, vegan, carnivore, gluten-free, low carb, etc. Once you have a list of 10+ meals your family will enjoy, shop the sales. Use the circulars – often available online – to find the best deals in your area, and don’t forget discount stores like Aldi’s. Match your meal list with the sale items that week – don’t forget to check your own pantry as well – and be ready to substitute where you can to take advantage of the store deals (ground chicken versus ground beef). In this way, meal planning can help you purchase food your family will enjoy while taking advantage of the sale prices each week. And meal planning will allow you to plan to use up items in your fridge and pantry, so less food is wasted. 

Taking Your Budget to the Next Level

Maybe you are already doing this? Then consider upping your game – most people have in their fridge and pantry the ingredients necessary to make their own condiments (catsup, mayonnaise, salad dressings). Or maybe you are ready to use the meat you got on a great sale to make freezer meals that you can use later – saving money and saving time. (Again, there are many apps, blogs, and Pinterest sites where freezer meal recipes are available for various diet preferences.) Crockpot cooking is a great way to make less-expensive meat cuts into extraordinary meals. These tips may seem obvious to some people, but, as I said earlier, there are many households where this is the first time they are experiencing higher inflation so I hope that presenting some of the “basics” is helpful, especially for new budgeters. 

In addition to food, gas is another daily expense that increasingly consumes a sizable portion of our take-home pay. Some possible ways to contain this item in the budget include using an app (GasBuddy and Gas Guru are two) to find the cheapest gas near you, carpooling, taking public transportation, and biking or walking (as the weather gets better). 

Some Advice for Larger Purchases

The third type of expense in the budget is saving for larger purchases (also called “sinking funds”) such as a house, car, appliances, boat, RV, etc. This is a real problem area right now, given the type of inflation we are experiencing in the U.S. We all know that housing prices are sky-high, new cars are difficult to find, and recent reporting indicates that some dealers are charging OVER the sticker price for a new car. Used car prices are up 40% over last year. Appliances are experiencing record price increases. So, what can a family do about that? If your budget can afford the increase, you may want to purchase the item at an inflated price anyway. But, and this is the hard part, if your budget cannot afford the increase, you may need to wait to purchase the item or purchase a less-expensive version of the item. When the timing of a purchase can be flexible (a want, not a need), waiting might be the best financial option right now. 

Continuing to Invest During Inflationary Periods

One last thought: some households can absorb inflation’s effect on their budget, and the only financial result is lowering their monthly savings and/or investing to offset the higher prices. For these households, and households with existing investments, beware of the lure of inflation hedges. Of course, we don’t know how long inflation will last, but if you invest for the long-term, spontaneous reactions to short-term market events are not usually helpful to a long-term plan. I suggest people continue to think long-term with their long-term savings and follow the consistent and systematic investing strategy they already have in place (dollar-cost averaging). Investors could think of these weeks and months as the time when they are buying investments “on sale.” And, as interest rates rise, there may even be some higher-interest liquid savings opportunities that people can take advantage of high-interest savings accounts or better returns on money market accounts than we’ve seen recently. This might also be the time to investigate Series I Savings Bonds. These bonds adjust every six months based on the Consumer Price Index (CPI), offering investors an inflation-adjusted return currently at 7.12%.

In all cases, a written budget is more necessary now than it ever was before, as the only way to know what your family can afford and what behavior changes or sacrifices may need to be made (if any need to be made at all) is to have a spending plan.  

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