Inflation threatens our quality of life and makes it increasingly difficult for us to make ends meet. Can we survive it? In this article we propose a 10-point plan to achieve it.
1. Keep track of our expenses and income
Surviving inflation is basically about getting the most out of your money. But for this, it is first essential to know how much we spend. For this reason, it is important to keep a record of our expenses and keep it always updated.
In the same way, it is also important to include income in this calculation. It may seem obvious to us, but when we analyze our expenses in view of what we earn, we do it with another perspective.
It is usually best to keep this record monthly, although for some people it may be more practical to do it weekly. In any case, we must bear in mind that to see the results of this exercise, we must maintain it for several months.
2. Distinguish between types of expenses
The main thing is to differentiate between our recurring expenses (rent, electricity, food, etc.) and those that we make on a one-off basis. This second group could include, for example, the repair of a car breakdown or a weekend trip.
In the same way, we can also repeat this task with our income. If we have a stable salary, we would include it in recurring income. If a part of what we earn varies from month to month, we should count that money as one-time income.
3. Set priorities
Once we have classified our expenses, we must order them according to their importance. The result of this exercise usually varies from one person to another, but the idea is that it allows us to distinguish between basic needs, desirable but dispensable expenses, and those that do not add value to us.
In the first category we can include expenses such as housing or electricity. In the second, some small luxuries like going out to eat at a restaurant are expenses that we like, but we can live without them. In the third group, finally, we have the expenses that, in addition to being unnecessary, we do not take advantage of. For example, being subscribed to a movie platform that we never see.
In addition, it is important to understand that sometimes within an expense category we can have several subcategories. The most paradigmatic case is the purchase invoice at the supermarket, because in principle it is a basic need. However, not everything we buy at the supermarket may fall into this group. We may be buying essential things, but also others that are not. Therefore, it is necessary to take this expense classification exercise to the highest level of detail.
4. Analyze quantities and increases
This exercise consists of two parts. The first consists of ordering our expenses and income by amount. Starting with the most important, and ending with those that have the least impact on our finances.
Once this is done, the hardest part comes: discovering trends. The best way to do this is to compare the amount of each expense or income with previous periods. From there, we can calculate how much each concept has increased in the last 3, 6 or 12 months.
Ideally, we can do this calculation in two ways, both in absolute terms (the amount of money that the increase represents) and relative terms (as a percentage of the amount of our first historical record). In this way, we can have a more complete visibility on our financial situation.
For example, we may earn more than we spend, but if our expenses grow by 10% and our income by 5%, the figures tell us that we must take action because sooner or later we will enter a deficit. However, it is also important to see the impact in absolute terms, because some expenses may be increasing rapidly in percentage terms, but they are small. Others, on the other hand, may grow more slowly, but have a greater impact on our finances, as they are heavier.
5. Set maximums for each expense
This is probably the most difficult step of all. It consists of putting a spending “ceiling” on each concept, which would be the maximum amount that we could assign to it. However, as we have mentioned, we can encounter many difficulties when doing so.
The first of these is that it is impossible to predict with certainty the evolution of prices. In addition, some expenses (such as food) are linked to needs that can vary from month to month, which makes them relatively “unpredictable”.
However, not all bad news. Mainly, because here we are not dealing with one-off expenses, but with recurring ones. And many of these expenses, like rent payments or loan payments, tend to be somewhat more predictable.
Logically, the ideal would be that every month we could meet the objective of not exceeding the maximum that we have allocated in any of our expenses. However, this is not always possible. And it is in those cases, precisely, when we derive the greatest benefit from having established these objectives.
The reason is that, having previously prioritized expenses, we can try to compensate for the higher priority spending excesses with cuts in the less important ones. For example, if we see that this month we have spent more than we should have on groceries, we could postpone other expenses such as going to the movies for next month.
6. Review each expense
This is, without a doubt, one of the most important steps we must take to survive inflation. Therefore, many people would place it first. However, it is better to do it after we have all our expenses quantified and prioritized.
The objective here is to rethink the need for each expense, especially the recurring and last ones on our list of priorities. If both conditions are met, we will have identified an expense that we could cut.
In any case, it is important never to lose sight of the quantities. We may cut a lot of small expenses, but the total amount of what we end up saving is important. On the contrary, if it is not enough, perhaps we should go a little higher on our list and review some higher priority expenses.
Another aspect to keep in mind is that cutting an expense does not necessarily mean eliminating it. Sometimes, there are alternatives to reduce what we spend while keeping part of what we want to enjoy. For example, going out to eat less often, lowering the service level of our subscriptions, or buying cheaper brands in the supermarket.
7. Link income and expenses
This exercise is divided into two parts. The first is to compare the total amount of money we have earned with what we have spent. However, doing this is not enough to know the real situation of our finances.
The second part forces us to go into more detail and compare our income and expenses by category, between recurring and one-off. Here, the golden rule is to finance our recurring expenses with income that is also recurring. On the other hand, the punctual income could only be destined to pay eventual expenses, never recurring.
In this way, if we are considering extraordinary decisions such as using part of our savings or selling our car, we should use that money only for eventual expenses, such as medical treatment or work at home.
However, sometimes it is unavoidable to have to use our savings to live for some time. To do this, it is necessary to move on to the next point of our plan.
8. Have an emergency plan
As we mentioned, no one is free from the risk of being unexpectedly deprived of their sources of income, or facing exceptional expenses. For this, it is important that we have previously prepared an action plan if this happens.
A first step may be to take our monthly expenses as a base, compare them to our savings, and from there, calculate how long we could live on them if we lost our income. The objective may vary from one person to another, but it is desirable that we can maintain ourselves for at least a few months with these resources.
Another aspect to take into account is planning what expenses we could eliminate if we saw ourselves in that situation. For example, we might be able to afford a subscription to a movie platform now, but we might unsubscribe in an emergency scenario.
We also have to consider the liquidity of our assets, that is, the ease with which we can dispose of it when we need it. Money in cash or in a checking account is the best solution, but if we plan to sell a property or recover a deposit, remember that we will probably not be able to have the money immediately.
Designing an emergency plan is difficult when there is inflation, because forecasting our expenses in the future is complicated. For this reason, it is important to be very conservative when drawing up our plan, since here it is preferable to err on the side of prudence than by default.
9. Have a savings plan
In the same way that we have created an emergency plan, we should also have one for our savings. In a nutshell, it’s about setting a minimum goal of money that we should force ourselves to save every month. We can set this goal either in absolute terms or as a percentage of our income.
The objective may vary from one person to another, as it depends on the situation of each one. But even for those who can’t save much of anything, it’s a good idea to plan for the future. That is, if their income increases, they can commit to saving part of it.
As we have mentioned, there is no optimal level of savings, but we can use two variables as a reference. One of them is inflation, which devalues our assets. In this case, if there is inflation of 5% per year, we can set a goal that our savings grow at least that same rate.
The other variable is the possible expenses that we have had in recent months. If we have had extraordinary expenses, it is recommended that we make a savings plan to replace that money in the coming months.
In previous posts, we have shared some tips on how to save and protect our money in high inflation scenarios.
10. Advance purchases
One of the effects of inflation is to make future consumption more expensive than the present. Therefore, our savings will be worth less and less over time.
To counteract this effect, we can take advantage of offers and advance purchases that avoid future expenses. Logically, this is easier with durable consumer goods (appliances, cars, etc.), but we can also do it with others, including some foods. This is the case, for example, of meat or fish (which can be frozen), non-perishable foods and preserves.
In summary, we can say that surviving inflation is not an easy task for anyone, and there are no magic recipes to do it. Almost all solutions require some kind of sacrifice, but by following the steps we’ve outlined, we can at least minimize the impact. Therefore, we encourage our readers to apply our recommendations and comment on their experiences.