How To Budget for Inflation
(Originally published April 5, 2022) Adapt your budget in response to higher prices by following these 11 tips from BECU's lead financial educator.
Even in stable economic times, budgeting isn't a set-it-and-forget it sort of thing. It's always a good idea to revisit your budget often to make sure your spending and savings stay on track as your goals and expenses change over time.
During periods of inflation, prices of just about everything, including housing, food and energy, go up, even if your daily habits don't change at all. You need to make bigger adjustments to make sure your budget continues to work for you as you face these unexpected increases in prices.
Making big adjustments can be difficult, though, especially if you don't have much room in your budget. Nationally, unemployment hit a high of 14.7%, affecting 23 million people in April 2020, according to the U.S. Bureau of Labor Statistics. Unemployment rates have fallen sharply, down to 3.6% as of February 2023, but millions of people are still catching up, which can make budgeting for higher prices of basic needs more challenging.
"The bottom line is that you either need to make more or spend less," said BECU lead financial educator Stacey Black. "Most people have more control over how they spend money than over their income, so focus on your expenses — and look at every single item."
How High Is Inflation and What Is Causing It?
It's no surprise if you're feeling pinched, even if you haven't been on a shopping binge. Inflation has been cutting into your purchasing power with higher prices for consumer goods and services. When inflation peaked in June 2022, prices of consumer goods and services had increased 9.1% year over year, more than in any 12-month period since 1982, according to the Bureau of Labor Statistics. Prices have come down since June but are still up 6% from a year ago. Costs for food, shelter, electricity and natural gas have all increased in the last 12 months.
Supply chain issues, pent up consumer demand and savings that many people built up during the pandemic all contribute to higher prices, according to a report by The New York Times.
How To Adjust Your Budget
Price increases like these mean it's going to take more than a few little tweaks to stay on target.
Black recommends adjusting your savings and debt repayment expectations. You might need to temporarily redirect some of the money you had committed to paying down debt or saving for a large purchase to higher day-to-day costs.
Black offers these tips for budgeting to offset inflation.
1. Slow Down Debt Repayment
If you're actively paying off debt, but you're worried about making ends meet, you might have to scale back your payments, Black said. That means your target payoff date might be a little farther out than you'd like, but you might have to redirect that money toward basics like groceries.
"I hate to say it, but it might be worth paying just the minimum for a while because it's worth it not to get in more debt," Black said.
Even paying just the minimum will eventually help you pay down your debt. Just remember to keep your budget for debt payment steady and pay on time. When you pay off one credit card, for example, redirect those minimum payments to the next credit card, and the balance will drop faster.
2. Reduce Interest Rates on Debt
If you can lower your interest rates on your credit card debt, you can also make your payments go further. Explore balance transfer options with low or no interest. But Black says to use caution: Be sure your credit is good enough that you're likely to qualify for the offer. If you apply and don't get the new card, you might end up damaging your credit.
You'll also want to be sure that you can pay back enough of the debt in time to make the offer period worth it. If the rate jumps after 12 months, for example, does that give you enough time to pay down the debt?
A debt consolidation loan is another option to reduce your overall interest, but that option requires caution, too.
"Make sure you can commit to paying off the new loan without adding more debt to the credit cards you free up," Black said.
Use a debt consolidation calculator to be sure you will really save money in the long run.
3. Put Vacation Plans on Hold
If you've been saving for a big trip, you might need to push your travel date out a bit and adjust your vacation savings goals. You might need to apply your vacation savings to essentials for a while. Not all vacations need to break the bank. If you live in the Pacific Northwest, there are ample opportunities for a low-cost, local vacation in Washington state.
"If that vacation is really important to you, it might be motivating to look closely at your spending and cut out more of what you don't need," Black said.
But she cautioned against cutting back too much and not giving yourself any flexibility: "If you're too strict, you might splurge and put yourself in debt."
The same goes for other big-ticket goal purchases. Those goals might have been delayed already because of higher prices for things like new cars. Black said it's important to keep those goals in mind. They just should be a lower priority for a while. However, there are steps you can take to include fun in your budget.
4. Reduce Spending on Food
Your grocery budget is one of the areas hit hardest by inflation, with the food index rising 9.5% from February 2022 to February 2023. This is an improvement from the peak in August 2022, when the price of food was up 11.4%, the highest year-over-year increase for at least 20 years.
You have to eat, but there are some things you can do to save on your grocery bill as prices rise. Black offered tips, a few of which she picked up through her own efforts to develop healthier eating habits:
- Don't shop for groceries when you're hungry.
- Shop with a list.
- Plan your menu for the week ahead.
- Buy groceries online and pick them up curbside to limit impulse buys.
- Shop sales and plan meals around sale items you bought.
5. Save on Gas
In a bit of inflation relief, gas prices have decreased 2% since February 2022. That's a huge difference from the 60% year-over-year increase in June 2022, according to the Bureau of Labor Statistics. But when you consider gas in Washington state averages $4.30 per gallon, finding ways to reduce the miles you drive and increase fuel efficiency can be a big help to your budget. Bonus: Reducing fuel use is also good for the environment.
Here are a few tips Black has collected over her years helping people with budgeting and saving money:
- Plan your errands so you can take care of several tasks in one trip.
- Carpool with people who regularly go the same places you go.
- Take public transportation where and whenever possible.
- Shop for lower prices using an app like GasBuddy. (Limit the distance of your search or you'll cancel the benefits.)
6. Reduce Energy Use at Home
Utility costs are another category that have increased sharply in the past 12 months: Electricity has increased 12.9% and natural gas rose 14.3%.
Reducing energy use at home will save you money and reduces your carbon footprint. Here are a few ideas to consider:
- Use programmable thermostats and set the temperature higher when it's warm and lower when it's cold.
- Seal cracks around windows and doors.
- Seal holes and gaps in ductwork.
- Install energy efficient lighting.
- Wrap your water heater in a fiberglass insulating blanket and lower the temperature.
7. Shop Around for Insurance
Insurance is one of those services that's easy to forget about until you need it. But Black said it's a good idea to revisit your policy at least once a year — more often during periods of inflation.
Review your policy to make sure you only have the coverage you need, then challenge a few insurance companies to win your business.
8. Cancel or Reduce Subscriptions
As you go through the exercise of looking at all your expenses, Black advises paying special attention to all your subscription services, including magazines, newspapers, apps and streaming services.
Talk with members of your household to confirm how important some subscriptions are. You might be surprised to find that they no longer use the streaming service they were excited about last year.
If you have cable, think about whether you really need all the channels, or if there is a lower-priced option.
9. Re-evaluate Your Cell Phone Service
Cell phone service, like insurance, is another service you should re-evaluate periodically.
"Your cell phone carrier isn't going to call you and say you're not using all the minutes you're paying for," Black said. "It's up to you to make sure you're paying for what you use and make a change if you're not."
10. Reduce Housing Costs
Housing costs are the largest portion of most people's budgets, and, with an 8.1% increase as of February 2023, the average cost of shelter has increased more year over year than it has in at least two decades, according to the Bureau of Labor Statistics. They also can be the most difficult to change for the better.
If you own your home, refinancing your mortgage might save you money, especially if you can get a lower interest rate. But do your homework to be sure you'll be able to recover any closing costs. Use a mortgage calculator to run the numbers, check current interest rates and talk through scenarios with a licensed mortgage loan officer.
Whether you own or rent your home, you might be able to save by moving to a smaller home or a lower cost-of-living area, especially if you're able to work from home.
11. Keep Saving if You Can
As you evaluate your expenses and figure out how much you can pay toward credit card and other debts, Black advises looking for ways to keep saving.
"Even if it's a small amount every month or every paycheck, it adds up over time," Black said. "If you have an emergency, you'll be glad you saved."