Inflation can have a significant impact on your budget, so it’s vital to adjust for it each year.
According to the NYPost, a study was conducted with results showing that “Inflation is now costing average US household an extra $296 each month”!
This blog post will go over what inflation is and how it affects each of us with eight tips on how to budget for it!
This post may contain affiliate links; please see our disclaimer for details.
Table of Contents
What is Inflation?
Inflation in short refers to the increase in the prices of goods and services. It measures how much the price has risen over time and tracks how the value of the currency falls due to the price increase.
The truth is that inflation is nothing new, it is around us every single day.
It’s just that recently inflation has become crazy. This has made us pay more attention to its presence.
Normally inflation increases by about 2.5% every 30 years.
But the “annual inflation rate in the US accelerated to 6.8% in November of 2021, the highest since June of 1982”. – Trading Economics
What Causes Inflation?
There are generally two causes of inflation: the first one is Demand-Pull Inflation, and the other one is Cost-Push Inflation.
Let’s walk through each one.
Demand-Pull Inflation
Demand-pull inflation can be caused when the demand for goods increases, but the supply stays the same.
When there’s a surge in demand and sellers can’t keep up with the supply, their prices will increase. The result is called demand-pull inflation.
Cost-Push Inflation
Cost-push inflation occurs when the supply of goods is low, but the demand for goods is unchanged. As a result, the prices are pushed up.
For example: when COVID-19 broke out, the global supply chain had major disruptions. Because of the lack of supply issues like computer chips, caused the car market to become very hot. The lack of lumber caused the cost of building a house to become more expensive.
How inflation affects us?
Our standard of living is mainly based on two factors: your income and expenses.
Inflation will reduce the purchasing power of income while increasing daily expenses, harming living standards.
Salaried income will only increase a little each year, but expenses will suddenly increase a lot. This creates a major negative impact on life.
Our family’s expenses increased by at least $100 monthly for our cost of living.
I currently own a little Toyota Corolla, and it has awesome gas mileage. The cost to fill up the entire tank used to be $25 but now it’s $45!! My heart reaches out to all the SUV and Truck owners out there; gas has become a major expense!
I am still shocked to see how much it costs me each time to fill up. Also, when going to the grocery store, we can tell the food price and many other items have increased significantly.
How to Adjust Your Budget for Inflation?
Budgeting is an important part of finances. It is vital for periods of high inflation.
Here are eight tips for budgeting effectively for this economic occurrence.
1) Keep Track of Inflation
The first step to budgeting for inflation is to track it. You’ll have a better idea of how much your costs are rising and can adjust your budget accordingly.
There are a few different ways to track inflation…
The Consumer Price Index (CPI) is the most common, which measures the prices of a basket of goods and services.
You can also look carefully at specific items you spend a lot of money on, like gasoline or groceries, to get an idea of how their prices have changed over time.
2) Make More Money
To keep up with inflation, you need to make more money. This could be getting a raise at work or finding a better-paying job.
It could also mean finding extra income outside your regular job, such as freelancing or investing in real estate.
By increasing your income, you are planning for a budget surplus. To thrive in finances, it’s important to have a budget surplus. This gives you the ability to save and invest in the future.
3) Cut Back on Spending
If your income isn’t keeping up with inflation, you’ll need to cut back on spending. You may need to make lifestyle changes, such as eating out less or eliminating unnecessary expenses.
Sometimes it is necessary to make tough choices, like giving up your cable TV subscription or selling your car.
4) Find Cheaper Alternatives
Even if you can’t reduce your overall spending, you may be able to find cheaper alternatives for certain items or services.
For example, if you’re paying for a gym membership that you never use, it may be cheaper to cancel it and start working out at home. Or if you’re buying lunch daily, it could be cheaper to pack a lunch from home.
There are countless to save money, so take a close look at your budget, get creative, and see where you can cut back.
5) Invest in Inflation-Proof Assets
One way to protect yourself from inflation is to invest in assets that are not affected by it. This includes things like precious metals, real estate, and collectibles.
These assets can act as a hedge against inflation, meaning they will increase in value as prices rise.
My wife and I started Real Estate investing in our early 20s and have reaped many benefits. I created this article that you may be interested in – The Ultimate BRRRR Method Real Estate Investing Guide
6) Keep Calm and Disciplined
The most important thing to remember when budgeting for inflation is to stay disciplined, and calm. This means following your budget and not letting your spending get out of control.
It can be difficult to stick to a budget, but it’s important to remember that discipline now will pay off in the long run.
Inflationary environments are not the time to go on a spending spree. Because prices rise doesn’t mean you have more money to spend.
Stay disciplined and stick to your budget; you’ll be in good shape when inflation slows down.
7) Create Cash Flow Producing Assets
One of the best ways to keep up with inflation is to create assets that will produce cash flow. This could be in the form of blogs, online business or YouTube channels.
The key is ensuring that your assets produce more income than the rate of inflation. By doing this, you’ll be able to keep up with the rising cost of living and potentially even grow your wealth over time.
While there’s no guarantee that your investments will always outperform inflation, it’s still one of the best strategies for protecting your purchasing power.
So if you’re looking for ways to adjust your budget for inflation, consider creating cash flow-producing assets.
An excellent way to increase your PASSIVE income is by renting out extra space! With NEIGHBOR, you can easily rent out extra space, such as your garage, self-storage unit, rooms, etc.
8) Review Your Budget Regularly
Last but not least, review your budget regularly. This will help ensure you’re on track and adjust your spending as necessary.
Reviewing your budget allows you to reflect on your progress and set new goals.
Remember that inflation can continue to rise, so it’s important to be prepared. If you take the time to adjust your budget now, you’ll be in a much better position to weather the storm.
Final Thoughts
Inflation can majorly impact your finances, but by following these tips, you can adjust your budget and protect yourself from its effects.
Stay disciplined, track inflation, and ensure you’re earning enough money to keep up with rising prices.
With a little planning, you can safeguard your finances against inflation.
For example, if the annual inflation rate were 10%, you would need to increase your income by at least 10% to keep up with inflation. You can also adjust your budget to reduce expenses by 10%.
You can also find a balance of both worlds by looking for ways to cut your expenses and increase your income.
It might seem daunting, but if you split it between increasing income and lowering expenses, you can divide the inflation burden.
It is also important to remove liabilities from your life. Some examples of this are paying off debt and unsubscribing from services that do not bring you value.
I hope this article has helped give you some ideas on adjusting your budget for inflation. Make sure to share this article with your friends and family so they can also prepare for inflation.
Make sure to share with us ways you’ve been able to budget for inflation in the comments section below!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
