What’s Your Personal Inflation Rate?

Inflation talk is everywhere! It's in my inbox daily, I’ve been asked to be interviewed for two more television news stories on it, and it's an agenda item in most of my client meetings this month. Everyone is up in arms about the percentage increases to cost of goods in all of the standard categories: groceries, gas, used cars, etc etc. But you know what? I don’t care about the GENERAL average percentage increases, I care about increases on things that I spend on. 

Who cares if gas is up 150% if you don’t have a car and the cost of your subway pass is flat? Likewise, who cares if the cost of housing is down if I’ve just chosen to move my family from a two bedroom one bath to a 4 bedroom 3 bath house? It’s irrelevant. Yes, inflation does mean that some of the things you normally spend on cost more, but a 9% inflation rate doesn’t automatically mean you’re going to be 9% poorer if you buy the exact same things you always buy. There are so many factors at play and even if every single category you spend in is somehow impacted by major inflation increases, you have more control than you think in terms of managing your budget.

That's why I've been talking to clients this month about their feelings related to inflation and encouraging clients to do an exercise to calculate their personal inflation rate.

So, how do you calculate your personal inflation rate for the year? You take a normal month from 2021 and the same month in 2022 and you go through your spending for those two months for each of your spending categories. You then calculate the difference between last year and this year to see if you’ve experienced deflation, are in the same spot, or are experiencing inflation in that category and to what degree by percentage. 

I have a spreadsheet I’ve been sharing with my clients who want to do the exercise to calculate their personal inflation rate after our core meetings because it gives a pretty unique perspective and, especially if you’re part of a couple or do money with someone else, it provides some pretty good talking points for family spending. If you aren’t a client and want a copy of the spreadsheet, just email me and I'm happy to share.

Something to keep in mind is that that calculating your personal inflation rate using 2021 or 2020 numbers as a baseline may give you crazy skewed numbers that don't tell the full story because of social distancing, reduced ability to eat at restaurants, less commuting, and a variety of other factors. The exercise is still valuable, it's just important to know that if you get crazy high personal inflation numbers it doesn't necessarily mean your spending is actually completely out of control. You may just be making a conscious decision to spend more in different areas.

Our family’s spending in 2021 was wildly different than our 2022 spending. These changes have been driven by our choices, our life circumstances, and the pandemic.  There was no commuting to any office for either one of us, networking and social events were minimal or nonexistent, eating out was rare, flights and accommodations were WAY cheaper because of general feelings about travel and risk, I was pregnant and had a lot more medical expenses most of which were out of pocket and not covered by insurance, and we were preparing to move so spending on stuff was down. In almost every category except healthcare and groceries, we were down. Our average inflation rate as a family overall was down versus 2020 and even 2019. Regardless of the actual inflation rate in 2021, our family inflation rate was negative and we were able to sock away a lot of cash and invest at a higher rate ( I don’t know it off the top of my head and the wifi on the plane isn’t cooperating, but I know it definitely wasn’t negative). 

Compare that to 2022, yes inflation is up. And yes our family inflation rate is way up, but they aren’t a cause and effect. It’s not causation, it’s correlation. And it’s because of our CHOICES.

We moved our whole lives across the country 3 months after having a baby. We paid movers and moved into a much larger house. We committed to flying our parents out as much as they wanted to spend time with Dean. We chose to hire a full time nanny instead of juggling childcare ourselves and/or doing some part time care. It’s Bobbys 40th birthday this year and we’re going on a splurge trip to the Maldives. We have a wedding back in Boston in the fall and have some other trips planned. I could go on. The bottom line is, yes, we’re spending more on gas. But it’s not ONLY because of the prices at the pump, it’s because we weren’t going anywhere this time last year but this year things have loosened up and there’s more driving. We’re paying more for airfare and part of that is ticket prices, but part of that is we’re going on more trips to see people. 

If we wanted to cut back in many of the areas of our spending that have positive inflation, we could. But we’re choosing not to. And many of the dollars we’re spending on these things were saved last year. 

So what I’m trying to say is, turn off the TV.

Yes, average inflation is the highest it’s been in years. Hearing that 10 more times doesn’t do anything but increase your stress level. Your personal inflation rate might be down or flat. And if it’s up, it might be because you’re intentionally living your life the way you want to- doing more of the things you love. There’s nothing wrong with that. The important thing is to identify the areas of your budget where your personal inflation rate has increased so you can ask yourself these questions:

1. Why is my spending this year in this category higher than it was last year?
2. Is this increased/decreased spending intentional and/or contributing to my personal satisfaction?
3. If the spending change isn’t intentional and/or contributing to my personal satisfaction am I okay with it or do I need to make a change?

The goal in calculating your personal inflation rate isn’t to cut every category or your overall spending to flat or negative (unless of course you’re spending more than you want to or need to in order to achieve your goals or stay within your cashflow parameters). It’s really so that you can be thoughtful about your spending, reallocate dollars if needed, and have the overall confidence that how you’re spending going forward is the way you want to be spending.