Budgeting for Inflation
August 4 2022 Posted by John C Filice
If you thought the end of the pandemic would bring a return to economic normalcy, 2022 has certainly been surprising. Summer has seen inflation return to the forefront of consumers' economic worries for the first time in decades. The inflation rate was 8.1% in June 2022, its highest level since 1983. Egged on by spiking fuel and grain prices following the outbreak of war in Ukraine, increasing costs across the board are putting pressure on Canadian families.
Fortunately, you are not powerless in the face of high inflation. As a consumer, you can take steps to protect yourself. Here are some tips on how to manage your finances in these volatile economic times.
Start a household budget to keep track of your spending.
If you don't have a budget, you're not alone. According to the Financial Consumer Agency of Canada (FCAC), less than half of Canadians keep a personal budget. Carefully tracking your expenses, however, can make you more aware of how inflation is impacting you. If you commute by car, seeing how much you spend on gas might be the push you need to start carpooling, or think about replacing your old vehicle. If inflation is having an outsized impact on your grocery bill, seeing it in black and white may encourage you to reach for store brands.
Besides seeing which parts of your spending are most impacted by inflation, budgeting may make you aware of items that you can either do without, or substitute with cheaper alternatives. That expensive gym membership, the premium music and magazine subscriptions, the frequent food delivery orders – these are the kinds of things that you may want to reduce your spending on.
Don't know how to start budgeting?
Consider beginning with a free app, like FCAC's Budget Planner. This handy tool allows you to save a budget, compare your situation with other Canadians, and even export spreadsheets to work on offline.
Consider how you're managing your existing debts.
Where there's high inflation, high interest rates usually follow. The Bank of Canada surprised economists by raising their policy rate by a full 1% in July, to 2.50%. These rate increases get passed on to Canadians in the form of higher payments on their outstanding debts, including variable-rate mortgages and lines of credit. Fortunately, there are some things you can do to mitigate the impact of higher rates.
If like many Canadians you use a line of credit to pay for most purchases, try increasing the frequency of your payments. Regularly checking your balance and immediately paying off existing purchases will help you track your spending and avoid hefty interest payments that can really add up.
If you can afford to do so, consider increasing your mortgage payment to chip away at your principal and reduce the long-term pain if rates remain elevated. If you're a fixed-rate mortgage holder, getting accustomed to a higher payment will ease the strain of the higher rate you may be faced with at renewal.
Keep in mind that at any point, we can review your current mortgage and I can present you with options that might improve your position – whether that means getting a better rate, getting a mortgage with more flexibility or consolidating your debt to reduce your cost of borrowing.