How Inflation Impacts your Budget
No matter your preferred news source (Facebook, CNN, FOX, MSNBC, ABC, NBC, Twitter, etc.) you are bound to hear about the current state of inflation in the United States. It is absolutely true that inflation is a hidden tax, because it slowly eats away at your spending power. Unfortunately, inflation is a continuum and always present, but we rarely hear or even realize the impact it can have on our budget!
Currently in the U.S. inflation is at 6.8% year-over-year increase, which is a level not seen since the early 1980s. This means, on average, items cost almost 7% more than they did the previous year. However, this statistic can be misleading because it only represents certain goods/services. As we all know, gas prices are approx 41% higher this year than they were at last year. There are many factors that cause the price of goods and services to increase each year, but increases of almost 41% are felt by everyone!
For the average working American there is very little, if anything, we can do to control inflation. We can, however, understand how inflation will impact our monthly budget and plan accordingly. Since no one can accurately predict future inflation rates, at Blue Collar Budgets, I will work within your budget so you can maximize your “wiggle-room” to absorb the extra costs as much as possible. Yes, that may involve reducing the number of times you go to a restaurant or perhaps you will have to sell the boat that gets used 3-4 times a year. Depending on your unique financial situation, each client will need to account for inflation differently in their respective budgets.
As I mentioned above, inflation occurs every month of every year and slowly eats into what we call your “purchasing power.” This simply means that what you could buy with $10 last year, you will need $11 (or more) this year to purchase the exact same items. While this may seem small, given enough time costs could skyrocket past what is typically considered affordable. When considering all the separate items that the average person purchases in a month, you can see how an extra $1-3 per item can significantly impact your budget.
Of course, in order to understand how inflation directly affects your monthly expenses, we must first understand what is bought and paid for each month. Understanding Budget Basics with the help of Blue Collar Budgets allows you to keep track of, for example, how much you spend in groceries each month. If we know the cost of food is increasing 3-4% annually your monthly budget will have to take this into account. If you spent $400 per month ($4800 annually) on groceries last year, this year the same groceries will cost $416 per month ($4,992 annually). Next year, assuming similar inflation, the same $400 per month in year 1 now costs $433 per month in year 3. One can easily see how the costs of goods and services will generally rise, but there are some ways we can combat inflation.
One of the “easiest” ways to combat inflation is to increase your income. I completely understand this is not a real option for some people given their unique circumstances, but even an additional $250-500 in income per month can help offset the cost increases associated with standard inflation. The other aspect to review would be any monthly expenses that could be reduced or eliminated to help cope with inflation. This can be a temporary adjustment if inflation is expected to return to normal, but if rapid- or hyper-inflation occur, your budget might need a permanent change. I know that change can be difficult to manage and it might lead to uncomfortable conversations (e.g. no Disneyland vacation this year or you may postpone buying the latest and greatest cell phone) but your budget will certainly thank you in return.
If you believe inflation is negatively affecting your budget (which it is for everyone!) please schedule a consultation with Blue Collar Budgets. I want to help you take control of your finances and ease the stress and anxiety that inflation can have on your monthly budget.
