How Should Your Budget Change With Increasing Inflation?

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With two dynamics hitting the United States at the same time — a reopening economy due to eased COVID-19 restrictions and the threat of even higher inflation — it might be a good time to revisit your financial budget.

See: What Should Americans Expect With Inflation in the Coming Months and Years?
Find: What Is Inflation and What Does It Mean When It Goes Up or Down?

Many Americans are ready to start spending again now that more stores, restaurants and entertainment venues are emerging from lockdown. But they’ll find that certain items have seen the largest price increases in more than a decade, according to recent Labor Department data.

As CNBC noted in June, prices on everything from food and gas to lumber have risen sharply this year, making it difficult to return to a pre-pandemic budget. That’s true not only in terms of budgeting for everyday items like groceries, but also for travel and entertainment as well as home-improvement projects.

Christopher Owens, a certified financial planner (CFP) and senior advisor associate at Maryland-based Wealthspire Advisors, told CNBC that the key is to keep a close watch on spending categories that are likely to keep rising in the coming months.

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See: Why You Shouldn’t Worry About All Those Price Hikes in the News
Find: How To Save Money on All Your Monthly Expenses and Bills

“It’s likely to be more volatile in general,” Owens said. “It would be really good to keep your eye on your spending, probably every quarter, just as general household maintenance.”

If you wonder how to change your budget to deal with inflation, here are some tips:

  • Allocate more for food and gas: Consumer prices in the U.S. rose 4.2% during the 12 months ending in April, the BBC recently reported. That was the biggest increase since September 2008. Higher prices for cars and food drove much of the increase.

See: Understanding Interest Rates — How They Affect You and the US Market 
Find: What Should Your Post-Pandemic Savings Strategy Be?

  • Put aside more money for your emergency fund: Many Americans had to tap into their emergency savings accounts to make ends meet during the pandemic. If that’s the case, you will need to budget more money for savings than you might have prior to the pandemic. And because of the risk of rising inflation, you might also need a fatter emergency fund than you needed a few years ago.
  • Budget more for debt payments: Similarly, the pandemic caused many people to go deeper into debt to pay their bills during the pandemic. Inflation can be either good or bad when it comes to debt, USA Today reported earlier this year. On the upside, you can repay your debt with money that’s worth less than the money you borrowed. But on the downside, you might see rising interest rates on variable-rate credit cards. In this case, you’ll need to set aside more for debt reduction than before the pandemic.
  • Budget more for stocks: While many people struggled financially during the pandemic, others managed to build their savings because the lockdown prevented them from spending money on travel, dining out and entertainment. If this is the case, budgeting for stock market investments is one way to beat inflation, according to Forbes. The broader stock markets tend to rise over the long term, even during periods of high inflation, making stocks a comparatively safe place to put your money.
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    Last updated: Aug. 12, 2021

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    About the Author

    Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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