Inflation is rising: how to stick to your budget

When prices rise, it’s hard to stick to a budget. Are there ways to keep savings intact and avoid debt as inflation rises? We take a look.

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If money is tight, it’s crucial to stick to a budget as prices go up. Although inflation makes spending limits more challenging, getting into debt will only make things worse. Here are some tips for staying ahead of inflation.


Inflation awareness

Don’t let inflation take you by surprise. Understanding what is happening with price increases can help you stay ahead of the game. At the moment, the rate of inflation is rising towards 3%, and it could increase even further this year.

Economists and journalists are busy analysing the causes of the current inflation figure. The fact is that inflation can raise prices at any time, so it always pays to have an adaptable budget.

What does inflation mean for everyday shopping and bills?

You don’t need to monitor the Consumer Price Index to know that food prices are going up at your local supermarket. 

A 2.5% increase in inflation doesn’t mean that everything you buy is going to increase in price by 2.5%. Some things will stay the same price, and some will increase by much more.

Sometimes, one particular thing will go up in price drastically, energy for example, which can destabilize your budget.

Create a zero-based budget

A zero-based budget gives every penny a home. Each month, you set aside the amount needed to pay for all fixed costs, like your rent or mortgage, council tax and utilities. You then divide up the rest of your income into categories like groceries, travel, entertainment and clothes. At this point, you should evaluate whether you are spending too much in any of the categories.

Most importantly, with a zero-based budget, you set a figure to put away in a savings account each month. This can be the basis of an emergency fund that will enable you to pay for unexpected costs.

Choosing a fixed amount for each type of spending is the way to inflation-proof your money. It does mean that you may have to cut back on some things. For example, if the price of fuel rises sharply, you can borrow from your entertainment budget to cover it. As a result, you might have to settle for a less expensive brand of coffee.

There are apps to help you make a budget, or you can use a spreadsheet, or a notebook and pen. Zero-based budgeting forces you to adapt your spending habits to allow for inflation.


Beat inflation with a no-spend challenge

With inflation rising, a no-spend challenge may seem more difficult. However, it can be the best way to ride out a period of economic uncertainty and emerge with more savings in the end. If inflation has caused you to exceed your budget for a couple of months, a no-spend week, or month, might help you get back on track.

A no-spend challenge is a commitment to spending no money at all over and above the bare minimum need for household bills, essential travel, debt repayments and food. You don’t buy clothes, order takeaways or go to the pub.

Everyone can set their own rules, of course. Although a no-spend challenge may seem a rather bleak prospect, some people may enjoy devising cost-free entertainment. If there is a decent sum for your piggy bank at the end, the sense of accomplishment will make up for the hardship!

Make inflation work for you

Inflation is a two-way street. When prices increase, so must your income. This handy calculator will show you how much your salary ought to increase to keep up with inflation.

Rising prices are a good reason to ask for a pay rise, especially if your hourly rate has been the same for a long time. If you are self-employed or have a side hustle, you should be increasing your rates at least in line with inflation. 

When something becomes too expensive, it’s a good time to evaluate its worth. Inflation provides the opportunity to declutter your spending. 

Cheat your budget

As prices rise, it helps to overestimate costs and underestimate income. That way your budget is cushioned against any unexpected price hikes.

Inflation is a normal part of a functioning economy. It makes sense to plan for increases in your usual spending, while still looking out for a bargain. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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