Americans are feeling the impact of surging inflation, which doesn’t appear to be easing up anytime soon.
For many, that means it’s a good time to revise the family budget.
The Consumer Price Index rose 7.5% on the year in January, according to a Thursday release by the U.S. Department of Labor. That notched the highest reading of the inflation gauge since February 1982.
Nearly all categories measured by the index increased month over month, and all were higher than a year ago. Energy costs, food prices and used cars and trucks posted some of the largest jumps.
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“It’s critically important to revisit your budget and how you want to go about spending your money,” said Greg Giardino, a certified financial planner and financial advisor at J.M. Franklin & Company in Tarrytown, New York. He added that overspending now could lead to bad habits in the future.
Here’s what financial experts recommend Americans keep top of mind as they rethink their budgets.
Rising prices mean that the budgets Americans have used for the last year and a half will likely no longer work, said Christopher Owens, CFP, a senior advisor associate at Wealthspire Advisors in Potomac, Maryland.
But, because inflation hits consumer prices differently, each person will have to look at their own spending to readjust their budget. For example, if you’re not planning to buy a used car or truck anytime soon, you’ll avoid prices that are up 40% on the year.
Still, you will likely be affected by other rising costs, such as higher prices of food at home and in restaurants and energy. Take a look at what you’ve been spending in those categories and reassign dollar amounts to them 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 complicated.
“It’s important to do that one extra step — how much is it going to be to go out to dinner?” he said.
As inflation continues to push prices up, Owens recommends consumers keep a close watch on spending in categories where costs are increasing for the next few months and years, especially if they’re actively traveling.
“It’s likely to be more volatile in general,” he said. “It would be really good to keep your eye on your spending, probably every quarter, just as general household maintenance.”
If you’ve been overspending due to inflation, you may also have to make a few cuts, said Tania Brown, an Atlanta-based CFP and founder of FinanciallyConfidentMom.com.
That could be as simple as buying less meat, or weather-proofing your home to keep up with the rising costs of energy. It may also mean cutting out things that aren’t important to you, such as certain subscription services, said Brown.
Set a new normal
Americans have had to make many shifts since the pandemic started, including learning to work remotely and adhering to new rules and regulations.
As the pandemic continues, it’s important that people reassess their priorities to ensure they’re spending on the things that are most important to them. As inflation erodes purchasing power, this is especially true.
“What do you want that new normal to look like for you?” said CFP Tess Zigo, a 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’d like their money to go. Then, they should look at their spending and see if it aligns with those values.
In addition, expenses and incomes for many people have changed in the last year, making it critically important to reassess a budget.
Even those who were harder hit by the pandemic can and should do a similar budgeting exercise, said Giardino at J.M. Franklin & Company. He recommends starting with your take-home pay and allocating 50% to living expenses and utilities, 30% to leisure and travel, and 20% to savings, if possible.
He also said that people should always budget the way that works best for them, be that using cash, any number of spending tracking apps or simply using a credit card.
Financial experts also recommend allocating a portion of your budget to savings, if possible.
Of course, this may be difficult for some Americans as they grapple with higher prices. A recent survey found that 56% of Americans couldn’t cover a $1,000 emergency expense with savings.
Still, if you’re reviewing your budget, see if you can set aside a small amount each month to start building up an emergency fund. Even putting $5 in such an account each month starts you off 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 down more debt,” said Giardino.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.