4 Ways to Budget for Inflation in Uncertain Times
It’s no secret that the cost of essentials like groceries have risen over the last year. Inflation continues to snarl the U.S. economy despite the continuing efforts of the Federal Reserve to tamp it down.
Unlike fixed monthly payments for mortgage, rent or cell phone bills, the unpredictability of essential but variable costs like groceries can strain families and complicate Americans’ budgets month to month. In fact, 64% of Americans say that inflation has affected their saving and spending habits, according to Finder’s Consumer Confidence Index, a quarterly, nationally representative survey of U.S. consumer attitudes and trends.
To avoid falling into debt, it pays to create a budget or analyze your existing one to plan for the unpredictable nature of these expenses. Here are four ways to navigate inflation in 2023 to restore stability to your finances.
1. Determine the average cost of your variable expenses.
Safeguard your budget against inflation by first learning how much you’re already spending on variable costs. Review your bank statements across 12 months and add together expenses by type — groceries, gas and entertainment, for example. Divide the total by 12 to see a rough figure of what you spend in each category.
From there, you’ll have better insight into costs that are necessary, what you can afford this year and whether you can adjust to reel in rising costs.
Budgeting is also a good time to check in on news to see which way the financial winds are blowing. For example, with food prices expected to rise by 7.9% in 2023, you can multiply your spending average for groceries by this percentage to understand how much more you’ll need to adjust to keep up with inflation.
2. Cut back on nonessential spending.
Your budget review should include a breakdown of spending that’s not essential or necessary. Like groceries, insurance and other essentials, expect this discretionary spending to fall into fixed-cost and variable-cost categories.
Fixed costs include items like software subscriptions or gym memberships, while variable costs might include dining out, entertainment, hobbies or “treat” purchases.
If you find that paying for groceries or housing is becoming more difficult, shift some of the money from your nonessential categories to cover these essential costs.
It doesn’t mean you have to drop your spending on hobbies or entertainment, of course — everyone deserves their leisure time. But if it comes down to it, it’s wise to see where you might make tradeoffs with where you spend your leisure dollars.
3. Eliminate needless spending.
Stretching your income could be as simple as reviewing your spending and eliminating waste. As you review your bank statements to create or update your budget, note purchases that you don’t recognize or forgot you were paying.
Software subscriptions, recurring donations and gym memberships are examples of payments that can fall through the cracks. If you spot purchases you had no knowledge of whatsoever, now’s the time to address those too.
Budgeting apps like Trim and Digit can do this for you, not only canceling unwanted subscriptions for you but taking it a step further by negotiating bills down on your behalf.
While reviewing your budget, also look at your utilities to understand how much water or electricity you’re using. If your statements show a sharp increase in use, it could be worth calling your utility company to see if you can negotiate lower pricing. Simple steps like adjusting your thermostat or turning lights off when they’re not in use can also save you some cash.
4. Open a high-yield savings account.
If you don’t have one already, a high-yield savings account should be a priority item on your to-do list. If you do have one, review its terms to make sure you’re earning the most competitive rate.
The Federal Reserve increased interest rates seven times in 2022, with savings rates up by 0.29% since the beginning of last year. You can find high-yield savings accounts with rates 10 times higher than the 0.35% APY national average, with the best reaching as high as 5% APY.
A high-yield account can help offset the rising tide of inflation, earning you income on your savings. Although Regulation D is still suspended, most still limit withdrawals to six transactions a month, making them a good supplement to your existing checking account.
Like all things finance, reviewing your budget is the paramount step to easing financial burdens. With the government unsure whether we can expect relief any time soon, careful planning can help keep you and your family secure in the tide of inflation.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.