Managing your finances in inflationary times

Inflation, at the best of times, can be challenging.

Lately, it has been unbelievable. It has gotten as high as 7 per cent, with grocery inflation hitting 12 per cent!

Things are somewhat calmer now, with inflation closer to 4 per cent, but that doesn’t offset the fact that it rose significantly before leveling off. This has made things exceedingly difficult for many as they struggle with necessities.

How to beat inflation

People often ask me, in these inflationary times, how do you beat inflation?

You don’t. You can’t. All you can do is manage your finances as best as you can against inflation. Some may think, “Inflation is running at 4 per cent, and I’m making 7 per cent on my investments. I am beating inflation!” Wrong. In this example, as inflation is running at 4 per cent, your 7 per cent return is actually 3 per cent once you adjust for inflation. You haven’t beaten inflation; it just consumed 57 per cent of your return! Inflation always wins. You can, however, adjust for inflation and manage your expectations against inflation.

Importance of budgeting

The best way to do this is through budgeting. Yes, I said budgeting. Now wait! Don’t go screaming into the night running away from the ‘budgeting monster’! Budgeting can be your friend. 50 per cent of the country has no budget. 50 per cent of the country is struggling financially. 50 per cent of the country is living from cheque to cheque. Coincidences? Not likely. Budgeting sounds like an excellent place to start looking for ways to manage our financial expectations against inflation.

Budgeting measures and manages Income against Expenses. During inflationary times, expenses grow faster than income, and we need to do at least one of three things to manage against this reality:

1. reallocate income against expenses,
2. decrease expenses
3. increase income.

Track where your money goes

That isn’t all, though; we need to track expenses as well. Think of it this way. Your budget essentially says, ‘Gee, this is how I wish I were spending my money.’ By and of itself, it’s no more than a wish list. Tracking says this is how I am really spending my money. It’s essential to track your expenses and to have the reality of tracking ‘talk’ to the wishing part of your budget. Combined, you have a powerful tool. If you take away tracking, all you are left with is a wish list; wishing doesn’t pay the bills.

Yes, you need to track everything. ‘Come on,’ you think, ‘Do I really need to track everything? What’s a cup of coffee here, a muffin there?’. Well, if you lose track of just $5 a day. A coffee here, a muffin there, you’ll lose $1,825 a year!

Most people, myself included, can’t afford to lose nearly $2,000 a year because we didn’t want to bother with tracking expenses! A wish list just won’t cut it. Tracking will help determine which of the 3 options listed above you need to engage in. Be warned, in really tough times, you may need to consider all 3 measures.

Wants vs needs

While going through our budgeting process, we also need to develop a solid understanding of Wants Vs Needs.

Something you need is something that’s required for survival. Food, clothes, shelter, transportation. Something you want is a ‘step up’ over needs.

Needs	Wants
I need runners	I want Nike
I need a place to live	I want a 3,000 sq ft house

There is a dividing line between the Wants and Needs you pursue; that line is called ‘the things I can afford.’ A proper budget will help you identify those things that you can afford. Most of us are lucky, and the things we need and the things we can afford go hand in hand.

If we are really lucky, the things we want and the things we can afford also go hand in hand. Where we get into trouble is when the things we want fall onto the wrong side of the things we can afford. What do many of us do then? We go, ‘well, I want it, but I can’t afford it, so I’ll put it on credit’. Well, if you can’t afford it now, you can’t afford it 30 days later when the bill arrives. Don’t try to justify comfort wants as real needs. Doing so is a slippery slope, and following this path has led many a person to financial difficulty.

Understand Wants Vs Needs and use your budget to help you identify which side of ‘things I can afford’ your wants fall on.

Don’t misunderstand

Managing finances can be tricky. Many of us have complicated feelings about and relationships with money, and we’re often missing the necessary information and skills. And things are especially tough out there right now. If you are suffering, you are not alone – over 40 per cent of the country says that if they missed just one paycheque, they would have significant problems paying bills.  Until things get better, we need to focus on what we can control, taking a hard look at what we are doing, and making some tough decisions.  Budgeting and Tracking are the best tools to help guide us to those decisions.

Tim St Vincent is a retired CFP and is a Certified Educator in Personal Finance with the Credit Counselling Society, a Non-Profit organization.