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How to Rethink Your Budget to Fight Rising Inflation

Ethnic Taiwanese man watching household budget and settling bills using his laptop in his comfortable living room

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Americans are feeling the effects of rising inflation, which doesn’t subside any time soon.

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

According to a release issued Thursday by the US Labor Department, the consumer price index rose 7.5% in January. This was the highest reading of the inflation gauge since February 1982.

Nearly all categories as measured by the index grew month by month, and all were higher than a year ago. Energy costs, food prices and used cars and trucks made some of the biggest jumps.

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“It’s important to rethink your budget and how you want to spend your money,” said Greg Giardino, a certified financial planner and financial advisor at JM Franklin & Company in Tarrytown, New York. He said spending more now could lead to bad habits in future.

Here’s how financial experts advise Americans to rethink their budgets.

review prices

Rising prices mean that the budget Americans have used for the past year and a half will no longer work, said Christopher Owens, a senior advisory associate at Wealthspire Advisors in Potomac, Maryland.

But, since inflation affects consumer prices differently, each person has to look at their own spending to adjust their budget. For example, if you’re not planning on buying a used car or truck anytime soon, you’ll save up to 40% off prices every year.

Still, you’re likely to be hit by other rising costs, such as higher prices for food at home and in restaurants and energy. Take a look at what you’re spending in those categories, and reassign them to dollar amounts that make sense.

This is especially important for people who plan to travel in the future, Owens said, as budgeting for trips has become more complex.

“It’s important to take that one extra step—how ​​much will it cost to go out to dinner?” They said.

As inflation continues to drive up prices, Owens advises consumers to keep a close eye on spending in categories where costs are rising for the next few months and years, especially if they are actively traveling. .

“It’s likely to be more volatile in general,” he said. “It would be really cool to keep track of your spending, maybe every quarter, like normal household maintenance.”

If you’re spending more because of inflation, you may have to take some deductions as well, said Tania Brown, Atlanta-based CFP and founder of FinanciallyConfidentMom.com.

It can be as simple as buying less meat, or weather-proofing your home with rising energy costs. It can also mean cutting out things that aren’t important to you, such as some subscription services, Brown said.

set 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 is important that people re-evaluate their priorities to ensure they are spending on the things that matter most to them. Since inflation reduces purchasing power, this is especially true.

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

Zigo recommends that people sit down and think about their top financial values ​​and where they want their money to go. Then, they should look at their spending and see if it aligns with those values.

Furthermore, spending and incomes have changed for many in the past year, making it critically important to reevaluate the budget.

Even those hit hard by the pandemic should do a similar budgeting exercise, said Giardino of JM Franklin & Co. He recommends starting with your take-home pay and allocating 50% for living expenses and utilities, 30% for leisure and travel, and 20% for savings, if possible.

He also said that people should always budget in the way that works best for them, whether it is using cash, using any spending tracking app or just using credit cards. are using

increase savings

Financial experts also recommend allocating a portion of your budget for savings, if possible.

Of course, this can be difficult for some Americans as they grapple with high prices. A recent survey found that 56% of Americans with savings could not cover an emergency expense of $1,000.

Still, if you’re reviewing your budget, see if you can set aside a small amount each month to start building an emergency fund. Even putting $5 into such an account every month puts you on the right track towards 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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