How to budget for inflation

If real life were a movie, we’d hear scary music every time the word “inflation” was mentioned. We see the headlines, like "U.S. Inflation at 7.9% Highest Since 1982 as Prices Surge for Gas, Food and Shelter." We know it has real consequences for our day-to-day life. But many of us don’t know how to deal with it.

Because it’s been a minute since inflation was topping headlines, let’s break it down in everyday terms: inflation basically means the buying power of your dollar decreases. Today, a dollar gets you an avocado. Tomorrow, through inflation, that same avocado costs $1.10. The avocado hasn’t changed. The dollar is still a dollar. But the purchasing power of that dollar is weaker. 

Inflation explains why you might remember things costing more than they used to. One handy inflation calculator shows that if something cost $10 in the 90s it would cost $21.71 today on average. 

It makes sense to worry about how inflation affects your budget. Most people use a budget to get some control over their financial life, and inflation can threaten to throw a wrench in that. If rent and food cost more than they used to, there’s only so much you can do. But there are steps you can take to account for inflation in your budget.

How to adjust your budget for inflation

The first step is to ensure you have a budget. The better understanding you have of your income and expenses from last year, the better you’ll be able to account for inflation this year. 

Next, look at what prices are expected to go up. As you probably know, inflation doesn’t happen evenly across the board - some prices go up, others go down, or stay the same. There can also be regional differences. But you can still get a good idea of what to expect by looking at how inflation has changed prices.

Right now, the best predictions are that food, furniture, electricity, and rent are all likely to increase since that’s what happened last year.

The next step is to separate out what you’ll need to continue paying for, and what you could cut or reduce. For example, you can’t just stop paying rent or eating. But if you spot that you spent a significant portion of your income on clothing last year, you can reduce that or look for more cost-effective alternatives like ThredUp or thrift stores. 

Finally, determine if you can expect any pay increases. Some employers give raises to account for inflation, sometimes called a “cost of living” adjustment. If not, it could be something to bring up with your boss. Grow has a great script on how to broach the topic at your next performance review.

With this information, you can adjust your budget for inflation and make sure you’re prepared for what comes next.

How to be frugal during inflation

The problem is that even if you manage to get a raise, inflation means prices could be spiking out of your control. Updating your budget to cope with inflation is the first step, but the next step is balancing rising costs with cuts in your own spending, whether those are categories hit by inflation or not.

Here’s how to be frugal during inflation across multiple categories of spending.

Debt

The first thing to keep in mind is to avoid debt where you can. Debt is expensive - especially credit card debt - so when possible, make cuts somewhere else to avoid going into debt. 

Now might also be a good time to investigate how to reduce and consolidate debt. You can refinance multiple debts into a single monthly payment. This makes it less likely you’ll miss making the payment, and benefits from a potentially lower interest rate on the whole, too. Bankrate has a great resource to see what your debt consolidation options are.

Food

Food is one of the item categories with the highest expected inflation rate, so it’s important to know how to save on groceries during inflation. When it comes to food shopping, it can be useful to try new stores or products. Certain foods might be cheaper at particular grocery stores, and you can look into choosing more frozen options. Fresh From the Freezer offers a few examples, such as broccoli (50% cheaper) and seafood (25% cheaper). 

Planning meals in advance can reduce food waste and increase your savings, too. Americans waste nearly a third of the food they buy. If you can reduce that, you’re well on your way to fighting the costs of inflation.

Energy

Energy prices are rapidly hiking, so if you haven’t already, definitely schedule an energy audit. Many companies and local governments offer one for free - you can check this government resource to see if you find any near you. If not, the government offers some guidelines on how to conduct one yourself at home. There’s also some useful advice for how to reduce energy costs even if you’re fully optimized, such as how to spot “vampire load” appliances that use energy even when they’re not on.

Miscellaneous expenses

There are tons of different things we spend money on each month - it’s hard to categorize them all! So we’ll finish off here by offering some best practices on how to be frugal with miscellaneous expenses in general.

The evergreen advice is to review and remove any unnecessary subscriptions or regular purchases, like Netflix, Spotify, or any of the other thousands of on-demand streaming services you signed up for once and forgot to cancel before the free trial ended. You can also compare your internet and TV bills with competitors and switch if there are lower prices on offer. These vary by location, but you can get a decent idea of competitor prices using a site like reviews.org.

Finally, when you’re sitting down to remove unnecessary expenses, make sure to keep your long-term priorities in mind. For example, it may make financial sense to continue investing in the stock market, or towards your retirement fund. These investments are likely to continue appreciating in the long term. Even if you don’t continue putting money into these funds, think twice before you remove money.

Other expenses, such as house insurance or life insurance, might be worth maintaining as well since they offer financial protection in worst-case scenarios as well as peace of mind. Ultimately, you know best, since it’s your budget.

Make your own inflation survival guide

Most experts agree: things will get worse before they get better. It’s time to hunker down and make sure you’re set for the coming months or years of higher prices. 

If you’ve updated your budget for inflation to have a better idea of what to expect and conducted a frugality review to make sure you’ve minimized expenses where you can, then you’re as prepared as you can possibly be for the future.

Not to mention, you’ll also be in a stronger position when inflation begins to slow. Knowing how to budget for inflation is a great skill to have. Being smart with your money and understanding how to live frugally will always serve you well.