How to Rethink Your Budget to Fight Rising Inflation

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Taiwanese man looking at the house budget and sorting through the bills using his laptop computer in his cozy living room

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Americans are feeling the impact of soaring inflation, which doesn’t seem to be abating anytime soon.

For many, this means it’s a good time to revise the family budget.

The consumer price index rose 7.5% year on year in January, according to a statement released Thursday by the US Department of Labor. That landed the highest inflation gauge reading since February 1982.

Almost every category measured by the index rose month over month, and all were higher than a year ago. Energy costs, food prices and used cars and trucks posted some of the largest increases.

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“Reviewing your budget and how you want to spend your money is extremely important,” said Greg Giardino, certified financial planner and financial advisor at JM Franklin & Company in Tarrytown, New York. He added that overspending now could lead to bad habits in the future.

Here’s what financial experts recommend Americans keep in mind when rethinking their budget.

Review prices

Rising prices mean the budgets Americans have used for the past year and a half are unlikely to work anymore, said Christopher Owens, CFP, senior associate adviser at Wealthspire Advisors in Potomac, Maryland.

But, as inflation hits consumer prices differently, everyone will have to review their own expenses to readjust their budget. For example, if you are not planning to buy a used car or truck soon, you will avoid prices that increase by 40% over the year.

However, you will likely be affected by other rising costs, such as rising prices for food at home and in restaurants and energy. Look at what you’ve spent in those categories and reallocate the dollar amounts to them that make sense.

This is especially important for people planning to travel in the future, Owens said, because budgeting for travel has become more complicated.

“It’s important to take that extra step – how much will it cost to go out to dinner?” he said.

As inflation continues to drive up prices, Owens recommends consumers keep a close eye on spending in categories where costs will rise in the coming months and years, especially if they are actively traveling.

“It’s likely to be more volatile in general,” he said. “It would be really nice to keep an eye on your expenses, probably quarterly, just like general housekeeping.”

If you’ve overspent due to inflation, you may also need to make some cuts, said Tania Brown, Atlanta-based CFP and founder of FinanciallyConfidentMom.com.

It could be as simple as buying less meat or weatherproofing your home to deal with rising energy costs. It can also mean removing things that aren’t important to you, such as certain subscription services, Brown said.

Defining a new normal

Americans have had to make many changes since the pandemic began, including learning to work remotely and complying with new rules and regulations.

As the pandemic continues, it’s important for people to reassess their priorities to make sure they’re spending on the things that are most important to them. As inflation erodes purchasing power, this is especially true.

“What do you want this new normal to look like to you? said CFP Tess Zigo, financial advisor at Emerge Wealth Strategies in Lisle, Illinois.

Zigo recommends people sit down and think about their top financial values ​​and where their money is going. Then they should look at their expenses and see if they match those values.

Additionally, many people’s expenses and incomes have changed over the past year, which makes re-evaluating a budget extremely important.

Even those who have been hit harder by the pandemic can and should do a similar budget exercise, said Giardino of JM Franklin & Company. He recommends starting with your take-home pay and allocating 50% to living expenses and utilities, 30% to recreation and travel, and 20% to savings, if possible.

He also said people should always budget in whatever way works best for them, whether that’s using cash, a number of expense-tracking apps, or just using a credit card.

Boost your savings

Financial experts also recommend allocating part of your budget to savings, if possible.

Of course, this may be difficult for some Americans as they struggle with higher prices. A recent poll found that 56% of Americans couldn’t cover a $1,000 emergency expense with savings.

However, if you’re reviewing your budget, see if you can set aside a small amount each month to start building an emergency fund. Even placing $5 in such an account each month puts you on the right path to better financial habits in the future.

“Once you have that safety net, you’ve earned the right to invest more or pay off more debt,” Giardino said.

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