I’m a Financial Expert: 5 Things You Must Do When Your Expenses Rise by $2,500 or More

couple going through their paperwork together at home
PeopleImages / iStock.com

From rent and groceries to child care and travel, many people have experienced rising costs over the past year, and these extra expenses are often straining budgets. In fact, a recent GOBankingRates survey found that 34% of American adults have experienced at least a $2,500 increase in annual expenses in the last year.

When this increase happens, it can be easy to blame inflation and do nothing. Even if that’s the driver — although spending decisions often play a big role — you still need to be able to account for these extra costs, especially if you already are living paycheck to paycheck.

In this article, Dr. Dan Pallesen, a licensed clinical psychologist who’s also a certified financial planner and private wealth manager at Creative Wealth Planning, explains five steps you should take if your yearly expenses have gone up by $2,500 or more.

Identify Your Values

Before looking at your budget, first identify your values and/or your vision for your life, said Pallesen. That can help clarify what other steps to take.

“Because what is the point of cutting back on expenses if you do not have a clearly defined direction you want your life to take? Are you someone who values security and your vision for a good life is to always be sure you are living in surplus? Are you someone who values relationships and would gladly sacrifice time and money to be able to create memories with others? It is important to know who you are, what you desire, and what you stand for,” he said.

Investing for Everyone

Set/Review Your Budget

With your values/vision in place, you can get more into the numbers and set or review your budget to reflect your actual expenses. “You need to be honest with yourself and realistic with what you are actually spending. Keep it simple with just two categories: needs and wants,” said Pallesen.

Needs include fixed expenses like housing costs, food and medical care “required to maintain your basic standard of life,” he explained. “Wants are any other expenses.”

Writing out the numbers, rather than doing the math in your head, can be important for setting useful budgets. Ideally, you have data from prior months that you can review, and you should also “make sure your expenses are written down so that you can compare them in the future,” said Pallesen. Also, be careful about what you put into the needs vs. wants categories.

“Once we label an expense a ‘need,’ we may assume that it is fixed and look to cut other expenses. But we should reevaluate our ‘need’ expenses. For example, housing costs feel like a need, but maybe the location of your home is less important if the nature of your work has shifted to remote work. You may be able to save hundreds of dollars a month by moving,” said Pallesen. “It is hard to make that kind of an impact on your monthly budget by cutting smaller items like your Netflix subscription. Be sure to equally consider all of your expenses when looking to make cuts, not just your ‘wants.'”

Find Values-Aligned Spending Reductions

Once you know your values/vision and you have a clear budget, you can find areas to reduce in a way that’s sustainable for you.

Investing for Everyone

“If you value health and wellness, you may decide to keep the expenses related to maintaining your health such as a gym membership and focus on how to cut costs so that your budget is more in alignment with your values, like reducing the amount you eat out at restaurants. But if you value spending time with others, you may decide to continue eating at restaurants in social settings, but you may start to cut back on the multiple streaming services you have,” said Pallesen.

“We are more likely to stick to our cost-cutting attempts when we feel that we have not had to completely sacrifice our values to do so,” he added. “We can easily revert to excess spending when we do not have larger goals driving our day-to-day financial behaviors. That is why it is so important to identify our values and vision, and ultimately how money is related to those driving forces in our lives.”

Determine Additional Income Goals

The answer to managing rising expenses isn’t always to cut spending. Sometimes you may want or need to add income to manage higher costs.

For example, “If you value travel and adventure but your expenses exceed your income, it will be hard for you to conclude that reducing expenses — including travel — is how you should balance your budget. You may decide to pour into a side hustle because it is motivating to you to envision more travel in your future,” said Pallesen.

“On the other hand, someone may value quality time with their family and recognize they only have limited time while their children are in the home. It would not be good for that person to work longer hours to keep the family budget balanced. Instead, they may find costs to cut that do not impact their ability to spend time together as a family,” he added.

Investing for Everyone

Watch Out for Lifestyle Creep

Lastly, dealing with rising costs also means watching out for lifestyle creep, also known as lifestyle inflation. Otherwise, the efforts you make now might be wiped out next year if your costs keep rising.

According to Pallesen, regular inflation is “an external factor that causes the goods and services around us to get more expensive over time. But lifestyle creep is an internal factor that happens when we mindlessly accept the increased consumption of those goods and services in our lives.” He continued, “Lifestyle creep is aptly named because it really does creep up on us. Staying connected to your values and vision helps to ward off lifestyle creep and keep your money in alignment with the life you are striving to live.”

More From GOBankingRates

BEFORE YOU GO

See Today's Best
Banking Offers