Budgeting and Cash Flow

Budgeting and Cash Flow

Incremental Changes that Are Beyond Your Control

Prices creeping up for things like utilities, rent, and food can erode your carefully planned budget. The blanket word used for this phenomenon is inflation. Inflation is not the same across the board – it will depend on what your budget is composed of. If you have a relatively low income, your budget will be mostly made up of food, rent, utilities and maybe some transportation. These items tend to rise in cost the most often on an incremental basis because they are needed, producers are able to raise prices and physical goods are hard to substitute or eliminate from one’s budget. If you have a higher income and a larger portion of your budget is on discretionary items like electronics, hobbies, entertainment and travel, inflation will not be as large of a problem because choices can be made to substitute or eliminate parts of your budget.

If you have a lot of income being derived from investments, forces beyond your control can also show up on the income side from changes in interest rates, dividend yields, or investment fees. If you have a rental property, some of your expenses may be subject to incremental increases, such as property tax and utilities payments.

The best way to handle these erosions to your budget is to know that they are there. Once you see the pattern of what costs tend to be subject to this incremental rising, you can predict what will happen for the following year and account for it, though it is best to plan for some inflation rather than none. Utilities, transportation, property taxes, and rent tend to go up with the inflation rate each year. Other items are more variable and you would have to see what pattern exists in your annual budget to decipher where the increases are in prices. There are cases such as electronics where prices decline each year due to newer and better options for products. This can be a source of extra money for your budget, but keep an eye on what you are getting and what the total cost is. As an example, the cell phone may be cheaper, but the cell phone plan may be more expensive.

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