Could old-fashioned budgeting help alleviate massive inflation?

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According to May Consumer Price Index (CPI), year-over-year inflation figures (May 2021 – May 2022) saw consumer costs increase by 8.6%. In June, it was 9.1%.

To note: The CPI is a Bureau of Labor Statistics (BLS) tool that attempts to measure and track inflation. It assesses the evolution of the prices of several essential consumer goods and services such as utilities, food, fuel, etc.

Inflation

According to Merriam Webster, the definition of inflation isa continued rise in the general level of prices generally attributed to an increase in the volume of money and credit relative to the goods and services available.

Does inflation equate to a pay cut?

Indirectly but significantly, inflation could be likened to a person or a family taking pay cuts. Inflation decreases the purchasing power of money.

Example: John Snow was making $50,000 in 2021 when his employer gave him a whopping 4% pay raise. However, over the next 12 months, inflation has increased by 8.5%, which means John’s cost of living has increased by 8.5%.

John started with $50,000 + his $2,000 raise ($50,000 x 4% = $2,000), which gave him an income of $52,000 ($50,000 + $2,000 = $52,000 ). However, this 8.5% inflation meant that for John’s income to keep pace, he would have needed a $4,250 increase ($50,000 x 8.5% = $4,250) to keep up with the rate of inflation.

So, John’s actual financial situation saw him running an annual deficit of $2,250 ($4,250 – $2,000 = $2,250). Therefore, instead of a breadwinner that advanced John $2,000 for the year, John struggled even more. His purchasing power has decreased by $2,250. The purchasing power of his salary has essentially been reduced to $47,750 from 2021. ($50,000 + $2,000 – $4,250 = $47,750).

Inflation kills money

As inflation progresses along its destructive path, it minimizes the value of money. In doing so, it periodically causes the lowest hanging tender to disappear.

Death of Millet

It can be hard to imagine something worth less than a penny today. However, according to US Coin Value Advisorsthe ½penny (or 500 mills or mils) was one of the first two coins printed in the newly formed United States under the Coinage Act of 1792.

A mil is a monetary unit worth 1/1000 of a dollar (the dollar is considered the basic American monetary unit) or 1/10 of a penny. The US Mints did not produce mils (units less than ½penny), but some state and local governments did. They were cheap quality, usually plastic, tin, or even paper.

Fun fact – A single mil in 1800 was worth about the same as 2.3 cents today. (Based on the CPI Inflation Calculator)

Fun fact – A ½penny in 1800 was worth about the same as $11.60 today. (Based on the CPI Inflation Calculator)

Around 1960, virtually all millet production had ceased in the states. Inflation had deemed them useless. A mil valued at less than a penny was more problematic than it was worth.

The importance of budgeting

From my experience (within my practice), it seems obvious that when a person retires, they begin to learn how to budget their finances and resources effectively (a fixed income can be a good motivator).

However, until then, many of my clients admit that they weren’t focused on a “budget” or on firm budgeting principles.

Poor species

Cash Poor (not his real name) is a longtime federal employee who planned to retire later this year (2022). Cash’s wife (who is not a federal employee), Penny (not her real name either), is also planning to retire in 2022. Both have significant retirement savings which have been hit hard in recent months. They report that, combined, their retirement savings are down about 18% since the start of the year (YTD).

As their planned retirement approached and they realized that their retirement savings and self-designed retirement plan might not meet their needs, they thought it prudent to plan a Retirement readiness exam.

During this review, the topic of budgeting came up. Unfortunately, the poor did not have a structured budget. They simply had a philosophy (albeit a nice-sounding one) of “don’t spend more than we earn”.

Even THAT philosophy had holes. One way the poor adhered to their philosophy was to use credit to spread the debt over a long period. But of course that meant they kept less of their income due to interest charges… not a good budget plan.

We discussed a few budgeting strategies that might help them coordinate the effect of rising interest rates, pay off high interest loans, and save for the goals they’ve been looking forward to in their years. of retirement.

Good budget planning options

There are many good and bad budget plan options. Here are some of the good ones:

1. Shift budgeting

When I was a young man, it was quite popular among my peers. The idea is to first determine the amount needed for each “mandatory” item (i.e. rent, utilities, car payment, credit cards, etc.).

Next, separate out weekly or bi-weekly income and “slide some into each item until you hit your monthly goal.” We often used labeled envelopes or file folders to separate, slip, and store our money until it was time to pay each bill. Any excess was ours to use as we wished…a step into adulthood for sure. We were able to decide how to use this excess without fearing the dismay expressed by our parents.

2. Spreadsheet

Probably the next logical step in budgeting methodologies. This option seems to be quite popular these days with the feds I meet. You know the principle behind this budgeting technique (perhaps you have heard it called a spreadsheet). Instead of a folder or envelope, a spreadsheet categorizes each line item.

During Federal Retirement Readiness Examination, this is one of the tips we often give to beginners when it comes to budgeting. When using the spreadsheet budget, start with a baseline…what things are costing right now. First, add the total expenses for the last 12 months from the bank statements. Then subtract large one-time expenses and add any known additional expenses that can be anticipated in the future. Now divide that number by 12. This will give a projected monthly expense for future budgeting.

From there, the budget manager can go back to those bank statements and create categories on their spreadsheet as they see fit.

If they stick to the budget each month, they can anticipate how much they will spend on each item. They can also take inflation into account by adding known inflationary figures.

3. Percentage budgeting

This is another good beginner’s route to budgeting. It lets you decide how much you want to set aside for larger categories. Maybe you want to divide your dollars into three simple categories: necessary bills, your wants, and savings/debt reduction.

Of course, the necessities should be covered, but provided your income permits, you can determine that a 60/20/20 percentage works best for you. 60% necessities, 20% wants and 20% savings/debt reduction.

Virtually any percentage could be applied within each percentage bracket – as long as necessities are always considered first.

Depending on the federal employee’s situation, we may discuss one of these budget options or another budget plan. The idea is to get federal employees thinking about and implementing budgeting. In today’s environment, this may be more important than ever for virtually everyone.

Budgeting could teach better money management, restraint, patience, focus on financial goals, recognition of where your money is going, and better preparation for unexpected expenses – or runaway inflation!

The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual. Investing involves risk, including loss of principal. No strategy guarantees success or protects against loss. Silverlight Financial, Infinity Financial Services and its affiliates do not provide tax, legal or accounting advice. This material is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before entering into any transaction. For a list of states in which I am registered to do business, please visit www.silverlightfinancial.com.

Securities Offered by Infinity Financial, Member FINRA/SIPC. Investment advisory services are offered by Infinity Financial Services Advisory, an SEC-registered investment adviser

© 2022 Randy Silvey. All rights reserved. This article may not be reproduced without the express written consent of Randy Silvey.

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