How to brace yourself, and your savings, for inflation

Our household spending is up by about 10 per cent from last year.

At first, I thought it was because I’m 7.5 months pregnant, exceptionally hungry and nesting these days.

But, inflation is the primary culprit … and perhaps a few extra tubs of peanut butter chocolate ice cream.

Cars, furniture, shelter, gas, groceries, lumber, barbecue meats; it’s all costing more, according to new data from the Consumer Price Index (CPI).

Around this time last year, much of what a household purchased was a lower cost because we were at the front end of the pandemic, and the demand for consumer goods dropped rapidly while Canadians squirrelled away savings, if they could afford to do so.

It appears the brief era of widespread savings opportunities is coming to abrupt end as the economy reopens and “normal” consumption of goods (e.g. clothes and shoes) and services (e.g. drinks on a patio) resumes.

Try these techniques to brace yourself for higher costs, and still be able to save.

Rework your budget for higher costs

Yes, this means you need a budget. So, if you don’t yet have one, download a free template online and get started.

Begin with the essential categories like housing, groceries, transportation, gas, utilities, diapers, vitamins and medications.

As you proactively budget for the month ahead, which I highly recommend you do versus setting up your budget for any prolonged period of time, nudge these numbers up between three and six per cent.

Next, target the non-essentials: clothing purchases, activity fees, campsite bookings, subscriptions to streaming services and more. Nudge these numbers up a few percentage points, too.

Last, go through each item and highlight what you might want to trim. Maybe you don’t need three meal boxes a week and can get by with two. Or, perhaps one streaming service will do.

Meal plan for the week to keep grocery expenses in check and map out your trips, especially if you’re driving more than 200 kilometres a week, to reduce fuel consumption. Use up what you have in your pantry, medicine cabinet or storage cupboard before replacing or bulk buying more.

Though it’s tempting, don’t cut your insurance until you’ve thoroughly reviewed your needs with your respective providers and compared with others; this applies to your life, disability, critical illness, home and auto insurance. Trimming insurance without thorough analysis could expose you to massive risk in the event something unexpected happens, like you become sick or disabled or get into an accident.

But don’t be afraid to change your insurance provider and even to bundle up your coverage if it’s going to save you money, and still keep you properly protected.

If your actual spending comes in lower than the numbers in your budget, which means you’ll need to be tracking this, then congratulations … that just means you can save more, spend a bit on that bicycle you’ve had your eye on or put the excess toward debt.

Go and have some fun, but not on credit

It is very good for your mental health and well-being to spend money on having fun. Just be prepared because the restaurants, bars, social distancing concerts, golf games and sporting events will all be more expensive.

To avoid any unnecessary stress, pay in cash (or debit), and steer clear of accumulating a credit card balance, which will cost upwards of 19 per cent interest.

And, know that it’s OK to scale down the frequency of fun events as well as it being OK to tell your friends you are choosing not to spend money on something that isn’t good value.

Dial it back, but don’t stop saving

We’re not out of the woods just yet, so don’t take your foot off the gas when it comes to saving. It’s fine to reduce what’s being set aside, in order to make room for some wellness spending, for example, and especially if your emergency fund is fully funded (three to six months of essential costs is the best practice). But, by keeping this regimented savings habit up, you’ll be prepared for both emergencies and for any upcoming big-ticket-item purchases like that pesky roof repair or the vacation you desperately need.

When and if you’re ready, you can invest any excess savings for your retirement (but not your emergency fund! This should never be exposed to market risk).

If a large consumer purchase can wait, it probably should

Notice the cost of a new sofa, TV stand, computer, car or building a deck are all exponentially higher than a few years ago? It’s because the inputs that go into making these products are more expensive due to surging demand and/or supply shortages at the moment.

The economy still needs time to return to normal, which will hopefully level out prices for these larger purchases. But for now, expect them to cost more.

My advice is if you need something right away, embrace the second-hand market in the interim. It’s a terrific way to avoid paying a premium price and can often help the environment. The diaper changer and nursing chair I just purchased off of Kijiji were literally one third the cost of buying new, and were barely used.

And, if the purchase can wait, just hang tight, and keep saving in the meantime.

The savings heyday might be ending as prices rise, but healthy financial habits formed during the pandemic like budgeting well and stretching your hard-earned money as far as it can go, are worth keeping.