Two Biggest Dangers of Not Budgeting When There is Inflation
Inflation is the general increase in the level of prices. We have been experiencing it for the better part of last year and this year so far. As this happens, the purchasing power of our incomes is gravely affected, leading to poverty and unrest among us. However, when there is inflation, the onus is on us to protect ourselves from its effects. One of the ways of protecting us against inflation is to budget. A personal or household budget is a spending plan showing how much you earn and how much you expect to spend on various items. It shows you whether your income is enough to cover your expenses or you may need to find other means to fund your life.
A budget provides details about your money that help you plan for tomorrow. Planning protects you from future shocks and surprises when suddenly, you run out of money when you are in dire need of it. This could distract your life. Based on this, you need a budget, especially in an inflationary environment. Without it, you are in danger of facing the effects of not having a budget when there is inflation. Below are some of these dangers.
1. Your savings will be affected.
Inflation impacts your savings in two ways. One of these ways is what you may call a ‘technical’ impact and happens in the financial system, while the other one is real and happens on your side. On the technical side, when the Consumer Price Index (CPI) rises, also known as inflation, it usually is above the interest rate you earn for the money saved in the bank. In other words, even as your savings account earns interest, the real value of your money will be depreciating. A simple way to explain this is picturing your saved money buying a certain model of a car when you save it. Next month, before inflation starts rising, and you have earned interest on it, it still can but that car plus a couple of spares. But six months into a rapid inflationary environment, the price of the car has increased far more than the interest rates you earn on your saved money, and your saved money can no longer buy that, even with the interest. So, this is how inflation technically affects your savings.
Secondly, when there is inflation, your wages may start to not be enough to buy household goods for the month and pay bills at the same time. When that happens, you tend to tap into your savings to cover the gap. That is how savings are effected on your side. This second reason is the reason you need a budget when there is inflation. A budget protects you from doing this because you will always know how much you will earn in the month, and how much your groceries and bills will cost you. If your budget tells you that the expenses will be more than the income, you will immediately adjust it by removing certain luxuries from it in order to protect your savings. So, this is why you need a budget when there is inflation. Inflation comes and goes. Yes, even this round of inflation will eventually go, but you still need to have your savings intact when it does.
2. You could owe more debt
Above, I explained how inflation affects your savings if you don’t have a budget, but what happens if you do not have savings at all? Without a budget and savings, you are living on a cash basis, perhaps a paycheck-to-paycheck lifestyle. This is even more dangerous because rapid inflation sinks your buying power faster, and you won’t even know how it is affecting your income. And, from my experience, you cannot plan for what you do not know. This failure to budget or plan leads to more debt, and this is how.
So, let’s say you earn $4,000 each month, and your fixed bills (rent/mortgage, water, electricity, refuse, etc.) are about $2,400. This means you are left with at most $1,600 to pay for your groceries and leisure. Remember, this is without factoring in bank and transaction charges that definitely reduce that money below $1,600. If you do not budget, you will not know when the prices of your household goods have increased. You will also not know by how much they have affected your monthly buying power. Right now, gas prices are rising rapidly, and so are other basics we use every day. You may find that you cannot buy the same things you bought two months ago using the same amount.
Because you don’t know all these price movements, your money may eventually run out before your next salary. The next thing you do is to borrow to cover the gap. When your next salary comes, guess what you will do first? Yes, you will pay the debt first, which further reduces your monthly disposable income. A continuous repeat of this round will shrink your disposable income to almost nothing because you are now deep in debt.
The more you rely on debt to spend on household goods, the more you are in danger of damaging your credit score. And that will reduce your chances of accessing meaningful debt when you need it, for example, a car loan or mortgage. This is how deep not saving during inflation can affect you. You must budget to counter future price increases and keep your income in line with what you spend and even leave some to save.
In conclusion, you should also add financial discipline to the list of things you need to do now to protect your income from inflation. Without it, you cannot start saving. If you need help preparing your first savings template, download the one I have prepared for you. It is customizable and only costs you $19.99. if you get it once, you will never need another budget template because you can always renew the copy of that spreadsheet. Go and buy it now.
Frequently Asked Questions
- What are the positive and negative impacts of inflation?
Positive effects of inflation include the increasing value of assets and properties. More so, inflation is better than deflation, because the latter results in low growth, which affects businesses. However, negative effects of inflation include the reduction of real income or the buying power of your money, which leads to more inequality as the rich get richer while the poor suffer the most because of a lack of savings and investments that can appreciate with inflation.
- What are the three main effects of inflation?
Three main effects of inflation are reduction in savings, reduction of the buying power of money, and increase in debt levels, especially among the low-income earners.
- How does inflation hurt the economy?
Inflation distorts savings and investments in an economy. But an economy runs or grows on the level of savings and fixed capital formation (investment). But as inflation rises, savers’ buying power reduces, leading to reduced savings which can lead to low economic growth in the middle to long term.
- What is inflation affecting the most?
Inflation is mostly affecting the buying power of low and middle-income earners. Most of these people do not have investments that can protect them from inflation. They only have their earnings and more debt which they have to pay back with interest, which by the way, increases during inflation.
