Budgeting for high inflation

Updated: Jun 14


Inflation is such a hot topic these days. Regardless of the items we buy, everybody can relate to the fact that their paycheck doesn’t go quite as far this month as it did last month or especially last year.


The pain is real. The adjustment is simple, but it is not easy. The simplicity is in the budgeting formula. If spending = needs + wants, and the cost of needs increases, then either spending must increase or wants must decrease. It is not easy because a decrease in wants represents a drop in lifestyle, which isn’t easy.


If you have not already broken the categories in your budget down into either a need or a want, that’s an exercise I recommend. Once you have done that, you should go through most of the items in your Needs column and increase them by 10%. That is a cautious estimate of year-over-year inflation going forward. This shouldn’t include your mortgage payment, but should include consumer goods such as utilities, groceries, and fuel.


Since you likely did not get a raise in the midst of all this inflation, this 10% bump in these categories must correspond with a drop in categories in the Wants column. Try to target categories like entertainment, vehicles, and vacation rather than savings into college or retirement.


As uncomfortable as it can be, reducing spending is the best remedy for inflation at the moment. There may come an opportunity to convert assets to income, but most market assets are so depreciated right now that converting them means taking a substantial loss. Yes, the price increases are here to stay, but you can look to offset them in the future when marketable assets have appreciated back to their peak values.


I also don’t recommend compromising your saving to offset inflation. Savings represent purchasing marketable assets at low prices, and that is a key step to building long-term wealth.


So, in the meantime, tighten up a bit. Take fewer trips. Spend more time at home. And delay unnecessary expenses for a year or two. Like I said, simple, but not easy.


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