Why Your Spending Plan Needs Updating
By Kevin Gibbons
Whether you call it a budget or a Spending Plan, you need to have some sort of roadmap that looks at your income and your expenses, makes sure you are spending less than you are making, and you are spending on the things you really want to spend on.
When the Savvy Life creates a Spending Plan with a client, we emphasize that this is a living document. It needs to be reviewed and updated periodically to make sure that it truly reflects your financial situation. Whether you were overly- or underly-optimistic when you made the plan, your income changed, your expenses changed, or your priorities changed, you have to match your plan and reality or you lose control.
Much has been written and discussed about the recent bump in inflation. After years of quantitative easing to promote the economy, the Federal Reserve is raising interest rates and pulling money out of the economy to try to temper inflation. The year-to-year inflation rate started increasing in 2021, from 1.40% to 7.04% by December, and sits at 8.26% as of April 2022.(1) This means that on average, you will have to spend 8.3% more this year to buy the same amount of goods as you did 12 months ago.
But, if you look at the US Consumer Price Index report(2), you will see that some items, like energy costs increased significantly more (30.3%!). So, it isn’t as simple as just applying the inflation rate to your plan and calling it good. You really need to go through the categories in your plan and look at what you spent in the past six months, and what you plan to spend in the next six months and make sure they reflect reality as best as you can.
It can be depressing and confusing to do this. No one likes the idea of their money not going as far as it did before, or facing the fact that they may be now spending more than they make. But ignoring this imbalance will just make life harder in the future. It is much better to figure out how to realign your income and expenses earlier, before you have to include rebuilding lost savings or paying off more incurred credit card debt. If you find yourself in this situation, realize that you are not alone(3), but take action quickly! Update your spending plan to ensure you are still spending less than you are making and that you are indeed spending on the things that are highest priority to you.
If you would like help creating or updating your Spending Plan, contact The Savvy Life to schedule a free 20-minute consultation.
1. United States Inflation Rate, based on the Consumer Price Index, https://www.inflationtool.com/rates/usa#:~:text=The%20current%20inflation%20rate%20in%20the%20US%20is,annual%20inflation%20rates%20in%20the%20US%20from%201956., May 17, 2022
2. US Consumer Price Index Report, US Bureau of Labor and Statistics, https://www.bls.gov/news.release/cpi.nr0.htm, May 11, 2022
3. CEOs warn that US households are burning through savings at an alarming rate, and could run out within months, Dominick Reuter, Business Insider, https://www.yahoo.com/news/ceos-warn-us-households-burning-184328950.html, June 2, 2022
Kevin Gibbons is a Cash Flow Planning Expert, the Vice President of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past ten years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 700 individuals and families to create Spending Plans.
To learn about how Kevin and Melissa work with clients to create Spending Plans, visit The Savvy Life’s Home Page. If you’d like to learn about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page
