What is Inflation and How do you Budget for it?
Let me ask you this: Is your boss giving you a 2-7% payrise every year? Or a 6-20% payrise every 3 years?
I didn’t think so.
Every year your cost of living goes up by a little bit, and your paycheck buys a bit less today than it did last month or last year.
But a little bit across lots of things ends up being a lot over time, and if you haven’t adjusted your Spending Plan accordingly, or gotten a pay increase then you could soon find yourself going backwards and having to reach for a credit card to cover basic life stuff.
So it’s crucial to factor inflation into your budget and financial planning. Investing can even help you turn inflation into your advantage.
According to the Australian Bureau of Statistics (ABS) in 2017 the CPI rose by 1.9%, in 2018 there was a 2% increase. In the future it may be even more, up to around 3.5%, so I think it’s best to err on the side of caution and factor in for a 3% rise across the board.
You could either add 3% to everything in your budget, or If you have a Spending Planner then you could add the following percentage increases to the following bills for next year…
- Food & Non-alcoholic beverages – 1.8%
- Alcohol & Tobacco – 6.8%
- Clothing & Footwear – 1% *
- Housing – 1.5%
- Furnishings, household equipment & Services – 1% *
- Health – 3.3%
- Transport – 2.8%
- Communication – 1% *
- Recreation & culture – 1.7%
- Education – 2.7%
- Insurance & Financial Services – 1.5%
So for instance, you should add 2.7% to any school fees for next year. So if you were paying $1000 this year, then next year you should make it $1027 for next year ($1000 + 2.7% = $1027)
* These percentages were actually in the negatives on ABS CPI data but I have preferred to err on the side of caution and increase them a little to add in a buffer to your budget. It’s always better to be safe than sorry, if inflation was to suddenly take off.
A low inflation of about 2% is actually a sign of a healthy economy, and wages should adjust over time, but there are times when inflation is out of sync with wages and you just pay more for things at those times.
Once you’ve factored in annual CPI increases then you have a clear picture of whether your income is covering your expenses with room left over for saving and investing for the future.
If your expense are ‘line-ball’ with your income, or even higher than your income then you need to take steps to bring them into line quick smart. You might want to check out these articles to help you do that…
No-one likes to pay more for everyday things, but it’s a fact of life that we can’t deny. If we want to get ahead then we need to be realistic about what it REALLY costs to get there.