Inflation has hit the nation and it’s getting harder for families to stay afloat. Knowing how to adjust your budget for inflation is the key to surviving the higher cost of living these days.
While it can feel difficult to cut back or know where to make changes, making an inflation-proof budget will help you get through inflated prices for the rest of the year.
What is inflation and what causes it?
During periods of inflation, the price of just about everything you buy daily increases. Gas, groceries, clothing, household goods, and even services cost more. It’s like suddenly, your dollar is worth less than it was before.
Many factors cause inflation, so there often isn’t one thing officials can’t point their finger at. Usually, it’s higher demand and/or lower supply.
For example, the higher the demand is for a product, the more consumers are willing to pay for it, so prices increase. The same is true of supply. If the supply is low or the cost of production increases, manufacturers and, subsequently, retailers must charge more to put the same amount of product on the shelves.
How does inflation affect budgeting?
Inflation can cause even the best budget to fall apart. For example, if suddenly gas and food cost more than you have budgeted, you’ll naturally go over budget since you can’t not put gas in your car or feed your family.
During periods of inflation, it’s a good idea to revisit your budget and see where you can adjust, aka cut back in specific categories, to afford the essential items your family needs.
How to adjust your budget for inflation
Knowing how to budget for inflation is important. The changes may not be forever (at least we hope); however, in the meantime, you can make your money more available to provide for your family while you rethink how to handle your budget.
1. Pick up a side hustle to increase your income
Starting a side hustle is a great way to add income rather than figuring out where you can cut back and/or sacrifice. Yes, you’ll trade your time for making more money, but you won’t have to cut back on entertainment, eat out less, or figure out which groceries you aren’t going to buy at the grocery store.
No one likes to stand at the gas pump and panic about how much they’re putting in their tank or watch the total add up at the grocery store to the point that they have to put something back. Increasing your income allows you to live the same lifestyle without adjusting your budget too much.
2. Take on extra shifts at work for extra cash
If you work a job where you can take extra shifts at work, consider it. While staying at work longer may be the last thing you want, it can be easier than finding a side hustle or a part-time job. You’re already familiar with your job and know how much you’ll make if you take on the extra shifts.
3. Ask for a raise to adjust for inflation
Though it may seem odd to ask for a raise when money is tight for everyone, it’s still worth a try. This is especially true if it’s been a while since you’ve received one.
If you think you’re deserving (which you probably are), set up a meeting with your boss. Make sure you ask during a time they can listen and focus and not be sidetracked by issues going on at work.
Before your meeting, plan your strategy. Decide how much you’ll ask for and have your reasons planned. Gather as much evidence as you can about how you’ve improved the company and/or made things better to prove that you deserve the raise.
3. Change banks to get higher interest rates
Currently, the national average savings account interest rate is 0.07%, but some banks offer higher interest rates, especially online high yield savings accounts. So while you won’t make a ton of money, every little bit helps.
Consider switching your savings accounts over to online high-yield accounts at banks like Discover, Ally Bank, or Chime Bank. You might even consider switching some of your savings accounts to CDs at banks offering higher interest rates to make even more money.
4. Lower your interest rates on outstanding debt
If you have a lot of high-interest credit card debt, consider refinancing them. Look for 0% APR balance transfer credit cards if you have great credit. You’ll pay no interest for the introductory period, and if you pay the balance off before the rate expires, you won’t pay any interest.
See what other options you have if you don’t qualify for 0% APR credit cards. A personal loan, for example, can help you consolidate your debt at rates much lower than most credit cards charge. Likewise, if you have a high-interest mortgage or car loan, consider refinancing to lower your payments and have more money free each month.
5. Watch your energy and gas usage
Today’s national gas price average is $4.59 a gallon. In 2021, the national average was just over $3 a gallon. Energy prices have also increased significantly through the last year, with households seeing bills as much as 50% – 100% higher than in previous years.
Find simple ways to decrease your gas and energy usage to lower these costs. Here are a few ways:
- Don’t make more trips than necessary. Try bundling all your errands into one trip.
- Carpool whenever possible.
- Use GasBuddy or another similar app to look for low gas prices wherever you travel.
- Use a programmable thermostat in your house.
- Shut all lights and other electricity off when you leave a room.
- Make sure your doors and windows are sealed properly.
- Take care of any drafts.
- Keep the window treatments closed during the day in the summer and open in the winter.
6. Cancel unnecessary subscriptions and recurring expenses
It’s easy to elevate your lifestyle to meet your income, but some of those luxuries get phased out when expenses increase. Go through your bank and credit card statements and see what subscriptions or services you pay for that aren’t necessary. Some you may not even use anymore and don’t realize you pay.
Others you may use, but may have to limit for the time being until inflationary rates settle again.
7. Cut down on fun money
It doesn’t sound fun to cut down on fun money, but instead, reframe it and think of it as getting creative. How could you entertain your family for less money or even free? Let everyone in on the planning and have fun doing it.
Just because you can’t be out on the town all the time anymore doesn’t mean the fun has to end. Take advantage of free outdoor recreation, free public outings for residents, or find deals on entertainment on sites like Groupon.
8. Eat out less & reduce unnecessary spending
Eating out might be convenient, but it’s expensive–especially today. So instead of eating out, make your meals and snacks at home. It helps if you meal plan and shop sales and/or use coupons. Get creative with your meals and if you’re feeling incredibly adventurous, make meals ahead of time and freeze them, so there’s no reason to swing through the drive-thru on busy days.
9. Pay down debt
Paying down debt may not feel affordable when money is tight, but it’s the best time to lower your balances and stop paying excessive interest. Don’t scale back on your debt payments if you can afford them. Instead, prioritize them so you free up more money to save during periods of inflation.
10. Continue saving for retirement as is realistic
It can also be tempting to cut back on saving for retirement, but try to stay consistent. If you have to lower your contributions slightly to have more wiggle room in your bank account, do it, but don’t stop making contributions altogether.
You’re better off giving up current ‘pleasures’ than not saving for retirement. Every penny you save for retirement now will be worth much more when you retire, so keep up the savings.
11. Shop around to lower expenses
Sometimes adjusting your budget is the only way to battle inflation when rates get out of hand. If you’ve adjusted other habits and still don’t have enough money to make ends meet, see where you can cut back.
Look at services you might be able to shop for and get lower rates, such as insurance, medical providers, cell phone providers, and internet. Also, consider changing due dates on certain bills to meet your budget to free up more money to cover the basics like groceries and gas.
Example inflation-proof budget
Here’s a real-life example of an inflation proof budget.
John and Sally noticed that their overall spending has increased quite a bit over the last few months. Between higher gas, grocery prices, and the higher cost of going out, they realized they were saving much less than before and needed to cut back.
While they couldn’t cut their housing payments, utilities, and transportation costs, they could cut back in these areas:
- No more Starbucks stops ($100 savings per month)
- Canceled their gym memberships ($150 per month savings)
- Cut out buying lunch at work every day for both ($400 per month savings)
- Spent less money on entertainment ($200 per month savings)
With these savings, John and Sally prioritized paying down their debts, saving for retirement, and putting more money in their emergency fund should things get out of hand.
They also made small changes like carpooling to work, running errands once a week instead of daily, and being mindful of their energy usage at home. They also changed banks and were able to make more interest on their emergency fund, and they even invested some of the money into a high-yield CD.
Final thoughts on adjust for inflation
Knowing how to adjust your budget for inflation can lower your stress levels and make it easier to survive these unknown times. It might require some adjustments in your lifestyle, not just your budget. In the end, it will be worth it if you stay financially stable throughout the inflationary periods.