Inflation, stagflation, consumer price index, FED funds rate, prime interest rate, and FED open market committee sounds like the name of some bad 90’s Hair Bands, right?
No! These are just the latest financial buzzwords from our news streams. We are bombarded with all kinds of financial narratives and numbers that forebode some sort of economic meltdown.
How does it affect me, and what can I do about it?
First, let’s understand what they are telling us, and then we can work on a solution.
If we boil the narrative down to its simplest terms, the bottom line is that “Stuff Costs More.”
How much more? 8.6% more is the latest government estimate. That doesn’t seem too bad, right? If I spend $1,000 a month on householding living expenses, such as food, utilities, gas, etc., then 8.6% “more” means an increase of $86. To buy the same things that you have been buying, you would need to increase your spending from $1,000 to $1,086 or cut $86 from your previous spending.
I can live with that. We eat out one less time per month. I got this.
Well, as with everything, the devil is in the details. Although the average inflation is 8.6%, there are some categories where prices have increased far more than that average. Here are a few items with the year-over-year inflation percentage that directly affect most of us:
- Gas: 48.7%
- Electricity: 12%
- Food at home: 11.9%
- Food away from home: 7.4%
- Shelter: 5.5%
- Apparel: 5%
Gas is probably the one item that hurts the most. Since gas has increased in price by nearly 50% (instead of the average of 8.6% across all categories), it will dramatically affect your spending if you use a lot of gas. At my gas station, we are paying $2 more per gallon. That equates to $100 more each month for my vehicle alone, based on how much I drive. Because of the things we actually buy, our monthly increase in costs just to buy the same things is over $250, more than double the $86 that we detailed above based on the government-reported average.
That means we’re spending $250 per month directly related to inflation just to make the same purchases to enjoy the same quality of life. That’s a problem!
The other statistic released a few weeks ago is that credit card debt has increased by over $71 billion when compared to this period last year. I think some of us used federal and state stimulus dollars to increase our spending. Now, the stimulus money is gone, but we are still spending like it’s not. Not only did we get used to spending more on goods and services, those goods and services have gotten more expensive, dealing us a double whammy on home budgets. The dramatic increase in credit card balances shows that many of us are using credit cards to fund our inflated cost of living expenses!
Take my household example, the monthly increase in costs solely because of inflation is $250. Over 12 months, that increase equates to $3,000 a year. If you’re not careful, that $3,000 could end up as a permanent balance on your credit card. The annual interest cost of $3,000 added to your credit card at the average interest rate of 24% will cost you another $720, on top of the $3,000 you already incurred. Now, we’re talking real money!
Historically, we have inflation when demand exceeds supply, or in other words, when people want to buy more things than are available to buy. We all learned this back in the day. When this happens, the Fed steps in and raises rates and tightens the money supply. It’s their tool to get consumers to spend less. The current situation is a little different. There is a thought that demand is not the issue, but due to tariffs and supply chain issues, it’s a supply problem. If that is the case, demand may not drop. It will take time for supply to catch up, and inflation will persist during this catch-up period.
The summary is that we have household inflation that could be in the 25% range. It’s stubborn, the strategies that worked in the past may not be tailor-made to the current economy, and inflation may be with us for an extended period.
So what can you do?
Maybe you are fortunate in that you can increase your income by earning a raise, picking up another shift, or taking up gig work. If so, that may be the answer. Most of us don’t have that opportunity and will have to reduce our living expenses.
If you’ve ever participated in any of the classes we sponsor at NewTown, you know that we preach Personal Financial Statements, Budgeting, Business Plans, and the like. It’s essential to understand where your money is going.
We need a monthly budget. A budget can be simply written on paper or a sophisticated artificial intelligence cloud-based system. Whatever works for you. A budget is just a list of all the money coming into your household and all of the money going out. You have to track every dollar in each direction! Detail a budget and then review it at the end of the month. The first few times are really eye-opening.
Once you understand where your money is going, most of us can make subtle lifestyle changes to achieve our financial goals.
So, I bring my lunch to work instead of eating out, and that change saves a couple of hundred a month, allowing me to cover the $250 increase in monthly expenses for everything else that I have no choice about buying. That was my solution.
As always, NewTown is here and a resource. Come see us!