For the first time in 25 years, the US is contending with higher inflation than it’s used to in recent memory. We’ve all read the headlines about rising food and housing costs. But inflation has not consistently been above 3% since the mid-1990s (take a look at this chart for a more detailed look). The Federal Reserve has a target to bring inflation down to 2%, but it’s unclear if they will achieve this and when. Whether we end up with sustained inflation at 2% or 3%, the bigger question is: have you sat down to evaluate how it’s impacted your finances?
Recently, I did just that by revisiting my family’s cash flow plan. I was genuinely surprised at how much we were spending!
In financial planning, a cash flow plan is our starting point. It helps us determine how much money we plan to spend or save up to buy certain things like a house. While we can usually set our cash flow plan on autopilot after we create it, it is important to revisit it, especially after periods of high inflation or other big life changes.
Revisiting my own cash flow plan reminded me of how sometimes the original numbers we came up with will get stuck in our minds. The truth is that because of shifts in the economy or our lives, we’ll need to update those plans from time to time. Here are some things to consider when planning for inflation in your cash flow.
Take an honest look at spending and readjust if needed
Figuring out your cash flow the first time isn’t easy; the second time might be even more arduous. It may bring up feelings of fear – have I been overspending? Have I saved enough? I encourage you to put that judgment aside. The important thing right now is to take an honest look at how you spend your money to help you adjust so there are no surprises. Remember, inflation isn’t a phenomenon that’s within your control. But your money, and how you spend or save it, is.
Go back to the basics. Figure out your fixed expenses (rent, mortgage, utility bills) and then look at your discretionary spending (everything else). If you do all your spending on a credit card, pull up a year-to-date spending report or the past few statements. Go through the data: How much of your spending each month is recurring (subscriptions, etc.)? How much are you really spending on groceries and shopping, or travel and entertainment? You can then have a realistic look at what your total discretionary and fixed spending is on a monthly basis. Then compare that with your current take home pay. How does it match up? Are you still able to save what you want or need to?
After this part of the process, you can decide if you want to make some changes.
What if this means you can’t save as much?
After doing your analysis, you might discover that your spending has increased by $500 a month. Take a look at how much your income has increased or decreased – has it gone up or down by a similar amount? If you planned to save a certain amount of money each month, see if you are still on track. If you’re not, consider the ways you can get back there. Don’t beat yourself up over how much you could save or used to save. Remember, you’re re-evaluating your cash flow plans because circumstances have changed. When items like food or utility bills cost more because of inflation, it’s natural that you might not be saving as much as you planned. This is your chance to readjust your targets.
Then think ahead – what changes might be on the horizon? Are you up for a promotion and raise at work? Are you expecting an inflation adjustment in your income soon? Nothing is ever permanent, so take a step back and see where you may be headed.
Rinse and repeat – frequently!
Inflation isn’t the only reason to go through this exercise. I actually find it helpful every time there’s a big life change or even once or twice a year. Making this a more frequent part of your life normalizes it so it’s not such a big deal every time you sit down to evaluate your cash flow. As a result, you’ll have a more up-to-date view of where your finances stand, making you feel more in control of where your money is going. Especially when everything else is going up.
Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
Please read my legal disclaimer here.