How to budget for inflation: five key steps

Sticking to a household budget can be hard at the best of times: over a third of Canadians struggle to manage their day-to-day finances or pay their bills even when inflation is under control.1

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High inflation can make budgeting an even bigger challenge than usual, and record-breaking inflation can make it seem close to impossible: in May 2022 it rose to 6.8%, the highest it’s been in 31 years.2 When expenses grow so fast, without a similar increase in your income, your budget can be derailed. And if you’re a retiree on a fixed income, how do you make up the difference?

Sticking closely to your household budget is essential for good financial health. It ensures that you don’t go into debt and that you stay on course with your savings goals. Let’s look at some of the ways you can beat inflation, so your budget stays on track. 

Focus on paying off debts

When inflation starts pushing up prices, the first step you need to take is to reduce as many expenses as possible. Paying off high interest debt can substantially lower your outgoings. Credit card debt, which can have interest rates as high as 20% and up, should be a priority.

Variable debt, such as lines of credit, should also be a priority, as the payments increase along with the Bank of Canada’s overnight rate. Having variable rate debt makes budgeting more difficult, because monthly debt payments become higher than before — and that extra money has to come from somewhere. 

A debt consolidation mortgage can be a highly effective way of keeping your family budget on track. You take on one large, low-interest debt (usually a mortgage refinance) and use it to pay off all your high interest debts. Debt consolidation brings three key benefits:

  • The convenience of reducing several debts to just one
  • It can greatly reduce the amount of interest you pay on your debt
  • Your monthly debt payments can be much lower, thus reducing your monthly outgoings

Reduce your family budget costs

This may sound extremely simple, and some may consider it easier said than done, but this is an area of budgeting where you have the most control. There are several parts of your household budget expenses that you can focus on to reduce costs. You might be surprised at how effective this can be.

How to reduce your grocery shopping bills

Over two-thirds of Canadians say that rising grocery prices have had an impact on their financial stress.3 That’s understandable when you realize that between 2021 and 2022, the price of food in Canada rose by 9.7%.4 Groceries now make up a larger percentage of many household budget expenses.

There are several easy ways to lower grocery bill expenses within your family budget. Start off by shopping at cheaper grocery stores and those that offer price matching, such as No Frills and FreshCo. Download a price-matching app, such as Flipp, which allows you to find the best deals for groceries and other stores (2,000 in total). The price-matching store will then match or even beat the price offered by a competitor: you just need to show the digital flyer at check-out.

This is particularly good tip, because studies have shown that no single grocery store chain is the cheapest for every product you might need to buy.5 Price matching can help you to get the cheapest prices for most of your weekly grocery items.

Grocery-store rewards programs can also save you a lot of money. Grocery chain programs such as PC Optimum can bring you close to $100 in savings over a month, which effectively reduces your grocery bill considerably.

Wherever possible (and where the quality is the same) try to buy store brand items instead of name brands. Almost 80% of consumers believe that the quality of store and brand name products is the same. You could reduce your grocery bill by up to 25% by buying store brand items.6 This could be a big help in sticking to your household budget.

Cut back on fun spending

This is one you probably don’t want to hear, but for many people this is an essential strategy during periods of high inflation if they’re going to keep their family budget on track. You can still have fun while finding ways to lower your expenses. Here are some ways of doing it:

  • Skip dining out and instead order take-out. You’ll spend less overall, especially on wine and other drinks.
  • Watch sports on TV, rather than at a stadium. Yes, it’s not the same, but it will save you a lot of money.
  • Go on day trips from home during vacation, rather than spending thousands on accommodation away.
  • Go to concerts at smaller, much cheaper venues.
  • Have friends over to your home instead of meeting at a bar. 

There are plenty of tips that can help you to stop spending money, so that you can balance your budget. And it’s important to remember that this is only temporary. Once inflation has returned to more normal levels and your budget allows it, you can increase your fun spending.

Reassess your service providers

Take a close look at the services you subscribe to. There’s so much competition that there are bound to be ways that you can make some significant savings.

Phone/cell phone/internet: If you still have a landline, now is the time to get rid of it and just use your cell phone. Contact a cell phone brokerage (like The Mobile Shop or Best Buy) which sells plans for most, if not all, Canadian providers: they often offer deals that you won’t get elsewhere.

Also, consider downgrading your plan. Do you really need unlimited data? Try going down to one gig of data and hooking into Wi-Fi at cafes, restaurants and shopping malls, when you’re away from home. This alone could save you hundreds of dollars over a year.

Look into moving your internet plan. Companies like Teksavvy offer home internet services that start at under $50 per month and get good reviews for service.

Insurance: Car and home insurance are almost always cheaper when bought together. Insurance brokers can save you a lot of time and money by finding the best deal for your circumstances. Similarly, brokers can sift through providers of life, health, accident and disability insurance to find policies that could save you hundreds of dollars.

Cut cable: You could save hundreds of dollars a year by getting rid of cable TV altogether and instead relying on streaming services. The likes of Netflix, Amazon Prime and Crave have basic packages that start from around $10 per month. You can also stream sports services, such as TSN, from under $20 per month.

Mortgage: If your mortgage is coming up for renewal, now could be the perfect time to try and secure the best possible rate. Mortgage specialists often have access to dozens of lenders and can sometimes find rates that could save you thousands over your mortgage term. Lowering your mortgage payments will make a huge difference to your household budget. Discover more ways to save on your mortgage.

Increase your income

When you’re looking at how to budget for inflation, reducing expenses is only one half of the equation: boosting the income side of your family budget can be just as important. There are several ways to increase your income, you just need to get a little creative.

Ask for a raise: This is a simple one, but given the rate of inflation being so high, it’s not unreasonable to ask for a raise that helps your income keep up with rising costs.

Find a better-paying job: If a decent raise is not forthcoming, it could be time to look for a new job. With the Canadian unemployment rate dropping to 5.1% in May 2022, and tens of thousands of new jobs being added every month, this could be a good time to look for a better-paying job.7

Take on a side gig: Making extra income from a side business can have a big impact on your household budget. Starting a business that involves something you’re passionate about is always a good starting point. Websites like fiverr.com and upwork connect designers, copywriters, developers and many other types of skilled freelancers with companies that are actively looking for those services.

Rent out spare accommodation: Renting out a room, a basement unit or even a whole property can bring in a lot of extra money. Websites like Airbnb have made finding potential guests really easy, and you could charge hundreds of dollars per night for some properties. Check with your local municipality first, in case bylaws restrict short-term rentals. 

Invest for the times

During high inflation, it becomes even more important to continue investing, so that your portfolio has a chance to outperform inflation (and therefore not lose value). And if you rely on investment portfolio to provide income during retirement, it’s important to draw from investments that can keep up with inflation.

Below are some of the investment options to consider for periods of high inflation:

Treasury Inflation-Protected Securities (TIPS), a type of U.S. Treasury bond, are indexed to inflation so that they maintain the purchasing power of investors’ money. They do this by adjusting the amount of capital invested in the bonds whenever there are changes in the Consumer Price Index (CPI). When the bond’s principal is paid back, investors receive the larger of the adjusted principal or the original principal.

TIPS’ monthly distributions (the amount they pay out) are adjusted along with increases in inflation. Therefore, during periods of high inflation, monthly distributions increase.

Floating rate funds invest in debt that pays a floating (variable) interest rate. Compared to fixed-rate bonds, they can help protect against interest rate risk. During high inflation, the price of these funds remains comparatively stable, while traditional investment bonds often see their prices fall.

Real estate investment trusts (REITs) provide income that has very low correlation with the stock markets and bonds (meaning it’s rarely affected by moves in the markets). They can also deliver higher yields than conventional bonds during high inflation, as rent and lease agreements can be tied to inflation.

How your IG advisor can help you budget for inflation

Your IG advisor can be a source of crucial advice when you’re looking at how to budget for inflation. They can:

  •  Help you to improve your cash flow.
  • Explore ways to reduce your debt payments.
  • Connect you with an IG Mortgage Planning Specialist to work on debt consolidation.
  • Make suggestions to make your investments more inflation-proof.

Talk to your IG advisor today to arrange a meeting to discuss ways of sticking to your budget during high inflation. If you don’t have an IG advisor, you can find one here.  

 

 

Sources:

1 Government of Canada: Canadians and their money
2 CBC: Canada’s inflation rate inches up again
3 CTV News: Money is top stressor for Canadians amid high inflation
4 Statistics Canada: Rising prices are affecting the ability to meet day-to-day expenses for most Canadians
5 Money Genius: What’s the cheapest grocery store in Canada?
6 Consumer Reports: Store-brand vs. name-brand taste-off
7 Global News: Women lead job growth as unemployment rate dips to 5.1%

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.