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Budgeting and Planning During Inflationary Time

January 21, 2022

The start of a new year is always a good time to review and re-assess your financial plan and budget, but this year it is even more important than previous years to update your financial goals and spending priorities.

Since the mid 1990’s inflation has hovered around 2% (ranging between about 1.5 % to 3.5%).  However, the inflation rate started to increase during the spring of 2020 (bottomed at .12% for May, 2020) and continues through the most recent month of reported data (7.04% for December, 2021).

 Inflation Data 1920 - Present


Review your spending habits

Everything from gas to groceries has gotten more expensive over the last couple of years which is putting pressure on people’s finances.  While a lot of expenses are non-discretionary, there are many expenses items that can be reviewed, prioritized and potentially lowered.  Reviewing the last couple years of credit card bills is a good way to get a handle on what you are spending your money on and to also see what line items have increased significantly.  Is this from inflation or are you just spending on more things (restaurants, etc) There are software programs available that you can link your credit card and bank accounts to that track your spending by category.

 Understand your adjustable rate debt

Generally, when inflation starts to rise above the Federal Reserve’s target rate (2% – 2.5% per year), the response is to raise interest rates to help slow spending.  Those that have adjustable rate debt will begin to see the impact of higher interest rates in their monthly payments.  Credit card debt is an example of adjustable rate credit, and the rate is very high.  Currently the average rate on credit card debt is 16% and it is estimated to rise to 17% by the end of this year. Many people don’t know how high the interest rate on their credit card debt is.  Say you have a credit card balance of $5,000 at 17% interest, and your minimum monthly payment is $75. If you paid only that much each month, it would take more than 17 years to erase the debt, and you’d pay more than $10,400 in interest. But you could save thousands in interest charges and years of payments if you added $25, $50 or $75 to that monthly payment.

 Budget for investing

Try to put aside something each month to invest for your future goals, whether that is or retirement or college funding.  If your employer has a 401K where they match some percentage of your contribution you should at a minimum try to put enough money into the plan to maximize the company match.  This will help to lower your current taxable income and allow your investments to grow tax deferred until you start making withdraws.  And the company match is essentially free money.  Budgeting for regular contributions to 529 plans or other investment accounts is important as well as there are a lot of big expenses many years in the future that people don’t want to think about now.

Save for something

Start a savings plan with a goal in mind.  Maybe start an emergency fund that gives you some financial flexibility the next time something unexpected happens or save for a post pandemic vacation.  Whether it is $5 or $500 per month, setting aside money for a specific purpose helps keep people’s saving habits on track, even if you use the money for something other than the initial plan.

 At Chatham Wealth Management, we provide our clients with comprehensive financial planning and wealth management to help them achieve their long-term goals.  Feel free to contact us for a complimentary portfolio review (973)635-4265 or via our website