Family Budgeting during a time of inflation
Budgeting isn’t anybody’s favourite thing to do. It involves quite some work and ongoing maintenance, and requires perseverance and self-control beyond our comfort zone. So why talk of budgeting now? The challenge we all face is an environment where there is real income decline – our income is not keeping up with rising inflation. Meanwhile interest rates are rising, lifting pressure on those with mortgages, and also being a major influence in fast rising rents. We’re told to expect another year of going backwards. We’re told to brace for 40-50% rises in electricity and gas prices over the next two years, even after controversial government intervention to limit those rises. Regular floods keep destroying crops and lifting fresh food costs. From airlines to carmakers, many major businesses are taking the opportunity to enhance their profits by raising prices well beyond their cost of doing business.
What can we do? The budgeting process is helpful in making our funds go as far as possible in providing what we really want or need. Even if you don’t maintain the budget for a great length of time, the research that goes into it will inform better choices as to how you spend your cash. My recommendation is you start by documenting at least 3 months of all expenditure, categorising things into sensible categories we’re happy to track. We’re not looking at saving money just yet (though you may find immediate targets) – we’re instead looking at how all our funds are deployed.
What you’ll likely find is a series of surprises. Some things you enjoy you’re surprised at how little you spend. Some things you don’t find greatly beneficial you’ll be surprised at how much is spent. Beyond that we find that supposed one-offs occur with great regularity and cost a lot. We need to allow for them even if they change often, assuming they are essentially non-discretionary.
Once you have this data, you can review your situation. What is the gap between that earned and that spent? Is there a positive gap, meaning you’re saving, or is it negative – a gap filled with rising debts (often credit cards or Buy Now Pay Later (BNPL) are hole fillers)? A successful long-term budget will make allowances for a rise in the cost of non-negotiables – home mortgages or rents, for example. It will have space for at least some saving. It will not rely on credit card debt to fill holes. It won’t rely on future luck to pay for current consumption.
Next step is to consider each category beyond essentials and decide how much you value them. Is the size of the category aligned with its utility to you? How much is too much for work lunches or gambling or alcohol or cappuccinos or fast cars? With incomes rising slower than prices, we all need to make adjustments to not break the budget or to allow for the unexpected. There are a couple of ideas to squeeze benefits:
Home loans – are you on one of the better interest rate deals? Is your bank taking you for granted? This is an area of potentially large saving.
Credit cards – are you paying off every month, or have some revolving debt? The latter is exceedingly costly and should be avoided. Card annual fees should be considered. Do you have too many cards, paying fees? Do you use Amex and pay a bigger surcharge for limited extra rewards benefits?
Groceries – have you tried home brand products? Frozen over fresh? Have you tried alternative supermarkets? Are you buying in-season products or sticking with more expensive out of season preferences? Are you stocking up when items are on special?
Motor vehicles – we need reliable, cost-effective means of transport. I have another blog on the benefits of electric vehicles. Beyond that, holding onto a serviceable vehicle for an extended period is commonly much cheaper than regular replacements. If a petrol car, take into account fuel type acceptance – those that run on E10 are cheaper to run than those that require 95ULP or better. Purchasing more expensive fuel than a car requires has no likely benefit, whatever the oil companies parade. Fuel prices run in cycles, with Tuesdays often cheapest and Fridays most expensive. Buy when cheap, then try to stick with that weekly cycle.
Holidays – book ahead, and try to use your frequent flyer points where you can. You can book up to 360 days ahead for many types of travel component, and early bookings even during school holidays, are rewarded. Car travel has become relatively less expensive versus airfares, and may remain that way for years.
Eating out. We all love it, especially after the pandemic lockdowns. Once you know how much you spend, you can consider the quality of what you’ve done. You can enjoy a lovely night out without eye fillet every time. Eating in is often healthier, and very much cheaper, so when you go out, aim for quality over quantity.
Salary packaging is tax efficient and is often an excellent way to fund technology or cars or extra superannuation. Make sure your employer doesn’t short change you with reduced SGC Super payments when you package.
Never forget saving as part of the budget pie. That can be through tax efficient investment in extra Superannuation or property or shares. It can be through filling up an offset account or lifting rainy day bank savings. A better tomorrow doesn’t just happen.
We’re experiencing tough times, and we all deserve time off and time out. We can do that in a way that doesn’t detract from you making progress in your financial security and a degree of satisfaction that things are under control. You can become more diligent in getting the maximum out of what you earn and what you want to experience from life. You don’t need to continue the budget forever – if the process itself adds value and visibility to how you spend, that is a sizeable reward worth having in itself. Minor changes in behaviour or the search for consistent savings, can enhance the lived experience of any level of income.