Inflation may be falling but it is still high and for many people, the increase in cost of living can cause stress when it comes to managing your finances. In this article, we discuss how you can manage this stress by taking steps to manage your money.
First a comment about inflation. We have been feeling the impacts of high inflation for the last year or more, and recently have been hearing that inflation is now coming down. But, falling inflation does not mean prices go down, it means they go up slower than they did previously.
Falling inflation is still an increasing cost of living
This is important to remember when projecting your cost of living, and future plans.
Hand in hand with higher inflation we also have higher interest rates
This may be good or bad depending on who you are. For savers and lenders, it can be good news, as they can get a better return on investment through higher interest rates. It must be noted though, that higher inflation raises the bar for the return you need to make to keep pace with the cost of living.
If you are a borrower, higher interest rates are not welcome. It increases the cost of your repayments, erodes your cash flow and if you are investing, reduces your net return. If you have a mortgage at a variable rate, you will see this.
In an environment where inflation is still higher than it has been for many years and with interest rates now higher as well, how can tracking your expenses and budgeting help you?
Budgeting can help you to restore a sense of control
While many people dislike the idea of budgeting or tracking their spending or find it boring, it can help you to take positive steps towards your goals, reduce stress, and restore a sense of control.
Taking a proactive approach to budgeting encourages you to make conscious decisions as you begin to identify what is uniquely important to you. It’s the same approach we take to financial planning – understanding what is truly important to you and focusing on your goals, makes it more likely that you’ll achieve them.
Tracking your spending can also help you to see your progress and ease anxiety
Knowing where your money is going can boost your happiness. It can also uncover some of the less visible small expenses that accrue over time. You can pause and ask yourself if these discretionary purchases are more or less important than your goals. A small change in patterns of behaviour can have a large impact over time.
According to a study in the Journal of Consumer Psychology, you will tend to feel happier when you spend your discretionary money on:
- Social experiences, such as holidays or get-togethers with friends or family
- Buying time, such as hiring a cleaner, gardener, or someone to do your ironing
- Other people, in the form of gifts or charity.
When you track your spending, you’ll start to think about the type of expenditure that brings you pleasure. You’ll begin to notice discrepancies between what you spend money on and what you truly value. This enables you to adjust your spending so you can allocate more money to those things that bring you joy.
5 tips for budgeting and tracking your expenses
So, if tracking your expenses can boost your wellbeing, what is the best way to go about creating a budget?
- Review your outgoings and see how you spend your money. Identify your major spending areas (such as housing, transportation, and food) and estimate your average monthly spending in each category.
- Set a budget. After you’ve identified how you tend to spend your money, it should be clearer when it comes to creating a realistic monthly budget for future spending and saving.
- Break down your budget. It can help to split your money into necessities (what you have to pay for), discretionary spending (that you could cut back if you needed to) and long-term goals (such as paying off debt and saving for the future).
- Start tracking. Record your spending in each category and how it matches your budget goals. This helps you to improve your habits and increase your sense of confidence and control.
- Give yourself a pat on the back. Reward yourself for taking steps to become financially secure – and don’t worry if it’s a slow process. Small is better than nothing!
These steps don’t have to be onerous. Most banks will have an app that will do a lot of the classifications of expenses for you. This is a great place to start. Then, as it focuses you on what is most important, reach out to us and we can incorporate these goals into a financial plan that can bring all aspects of your financial life together.
Being on top of your costs through budgeting can bring certainty and reduce money stress. Speaking with us can build upon that and put you on track to make the most of your current position and set you up to achieve what is most important for you in your life.