June 02, 2022 | By: Gursh Singh

How to Manage Your Spending Amidst Inflation and Rising Costs

Money Management | Saving Money | Money Coaching

With inflation on the rise, it’s more important than ever to be frugal. Families face tough money choices when the cost of many products rises. However, there is hope for families to find ways to cut spending and lead happy and fulfilling lives.

Let’s talk a little more about inflation, its causes, the money choices you might have to make, and how to budget for inflation. 

What Is Inflation?

Inflation is a measure of how much the “purchasing power” of money shrinks over a set period of time averaged across multiple spending categories. In other words, it’s a measure of how much more money you have to spend to acquire goods and services compared to what you used to have to spend.

For example, if inflation is 5% year over year and you could buy a cookie at a price of $1 last year, then you would expect to spend about $1.05 this year. If inflation held steady at 5%, that cookie would cost $1.10 (rounded down) next year.

As of April 2022, Canada’s inflation rate was 6.8%—the highest it has been in over 30 years. However, it’s important to note that inflation rates aren’t the same for all products—the number is an aggregated estimate of the change in price for a variety of goods and services. So, for example, the cost of gas might increase a whole 10%, but the price of groceries might go up by 6% instead, while other goods and services might stay the same price.

The opposite of inflation would be deflation—when goods and services become less costly over time because of different market factors. For example, early on in the pandemic, Canada actually experienced a small amount of deflation (about 0.4% in May 2020) following the announcement of a few government benefits programs.

A topic that is tangentially related to inflation is the phenomenon of shrinkflation—which is when companies avoid changing the price of their products by putting less product in the packaging. For example, a bottle of laundry detergent might go from holding 4.55 L of fluid to holding 3.4 L instead—but still sell for the same price as before.

4 Causes of Inflation

After asking “what is inflation,” the next question is often “what causes inflation?” Inflation has many potential causes. Some of the common reasons that the average cost of goods might increase include:

1. An Increase in Money in Circulation

If the Bank of Canada prints more money, then the value of each dollar in circulation will decrease. This is because there will be more money available to pay for goods and services, but the same amount of goods and services in circulation.

This is one of the reasons why the government can’t simply print more money to cover its debts.

2. Disruptions in the Supply Chain for Various Products and Services

Even if there isn’t more money being put into circulation, the buying power of a dollar may still shrink if the number of goods and services available declines. This is often the case when there is a major disruption in the global supply chain—such as during COVID or when the Suez Canal was blocked by the Ever Given in 2021 (holding up billions of dollars of trade).

This is because there will be more people with more money available competing for a smaller number of products and services—a basic rule of the law of supply and demand.

3. Increases in Seller Costs

Inflation doesn’t only affect consumers—businesses are also impacted by increases in their own costs. When this happens, they often need to pass along these increased costs to their own customers.

For example, when the price of gas goes up, that has a direct impact on how much businesses need to spend to get their products from Point A to Point B. So, shipping companies start charging your local grocery store and other retailers more for shipping. Because of this, the store starts to raise its prices for the products it sells, too.

4. Devaluation of Canada’s Currency on the International Market

The amount of money the Canadian dollar is currently worth compared to other countries’ money can have an impact on the cost of goods—especially for imported items. If the Canadian dollar is devalued on the international market, then it ends up costing businesses and individuals who use the Canadian dollar more to import foreign goods.

So, if you like to buy imported tea or other products, a devalued Canadian dollar might cause the price of those imports to jump.

Inflation Budget Management Tips

Inflation on its own isn’t necessarily a problem. In fact, modest inflation can be a sign of a healthy economy where more people have more money to spend. However, this isn’t always the case.

There are times when inflation can outpace the growth of worker salaries—putting families in a tough position as they struggle to manage an “inflation budget” where they can’t get as much per dollar as they used to.

Here are a few ways to budget and manage spending that can help families get through periods of heavy inflation:

1. Try to Live within Your Means (Adjusted for Inflation)

One of the first pieces of advice our CEO, Bruce Sellery shared in a Cityline interview is for families to try to “live within their means.” It’s an old piece of advice, but it’s an important one. The challenge is that what could be considered “within your means” can change thanks to the economic impacts of inflation on your cost of living.

This is part of the reason why it’s so important to use a budget planner and expense tracker and to compare your expenses to previous months. By comparing expenses month to month, and especially in specific spending categories like food or entertainment, you can more easily track how inflation is affecting your budget.

The problem with not adjusting your spending to account for inflation is that it’s an easy way to run up your credit card debt.

For example, say you have a consistent expense that you need to pay regardless of how much it increases—like your rent/mortgage or the cost of gas for the car you use to get to work. If that cost goes up by a lot, then you need to make cuts somewhere else. If you don’t, then you might end up putting the extra amount you need to cover the additional cost on your credit card—which begins the spiral into debt as your costs keep going up as your income remains pretty much the same, all while you’re trying to deal with credit card interest payments.

2. Prioritize Your Spending

In the same interview mentioned earlier, Bruce suggests that everyone play a game of “Would You Rather…?” where every round is about cutting money out of your budget. This game serves to get people thinking about where they can make cuts in their budget and what their most important expenses are.

For example, would you rather cut some streaming services or lower your utility bill to save $50 a month? If the goal is to save $50, the easier option would be to cut the streaming services since that’s as simple as cancelling a few subscriptions (though some streaming services do their best to make it difficult).

However, if you really wanted to keep the video streaming going, you could reduce utilities by turning down the thermostat, washing clothes during off-hours, hang-drying clothes rather than using a machine, and unplugging a bunch of electronics that you don’t use regularly.

Creating a monthly budget and looking at where all of your money goes is a crucial step in any plan to start saving. Once you know where all of your money is going each month, you can evaluate whether you really want to be spending money on those items and find ways to be more frugal.

3. Follow Some Thrifty Shopping Tips

Even when you’re on a budget that’s tighter than ever because of inflation, it’s hard to resist the temptation to do some shopping. But, it’s important to be thrifty—especially during a “just for fun” shopping trip!

The next time you go shopping, consider:

  • Buying used instead of new (when possible)
  • Hitting up garage sales and being prepared to haggle
  • Avoiding name-brand versions of products and buying cheaper alternatives
  • Checking product packaging to see if they’re still the same size as before
  • Using rounding services to deposit the remainder of the next dollar into your savings account

These are just a few of the easy ways that you can work to reduce your spending during your next shopping trip.

4. Downsize Your Home and/or Vehicle

Downsizing your vehicle by buying a smaller, more fuel-efficient one that has a lower monthly lease or loan payment can be a critical way to avoid the pain at the pump and minimize your monthly expenses.

Similarly, it may be worthwhile to check if there is a smaller home available (or one further away from a major city) that would be more affordable to rent or buy. Although moving can be a big expense, it could be worthwhile if it lets you pay less for housing each month so you can focus on clearing other debts.

Of course, moving to a new home is often easier said than done. It’s important to take into account how a move might affect your employment, living expenses, tax situation, and more before seriously considering moving.

Need Help Managing Inflation to Get Out of Debt?

If you find that inflation is making managing your budget more difficult and keeping you from getting out of debt, it might be time to look for some help. Credit Canada is here to help you find the best way to get out of debt—whether that means working with us to get on a debt consolidation program, considering a debt consolidation loan, or going over other debt-relief options, like insolvency.

Reach out to us today to get started!

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