Living Costs Keep Rising, But My Paycheque Isn’t — How Am I Supposed To Stay Afloat?

Dear Paco,

I work and make decent money, but I've had to cut back on things thanks to inflation. I've focused on saving more and cooking more at home. But while inflation has supposedly been slowed, food prices are jumping each time I go to the store. I’m now buying only what I need and nothing more. It’s left me with so many questions about how to survive our current economy.

How do I make wise financial choices right now with everything getting so expensive? How do I keep a long-term perspective and make good long-term choices?

Basically, how can I survive increased costs of living, when my paycheque isn't keeping up with inflation?

Sincerely, 

Deflated

Dear Deflated,

Even if economists’ numbers paint a positive picture, the overall vibe of the economy is not great. Tech layoffs are not giving us a sense of confidence in the economy. And the inflation rate has been a lot higher than what we normally experience year over year. Over the last couple of years, instead of a steady, healthy inflation rate of 1 to 3 percent, in Australia we’ve felt rates climb to 7% in Q1 2023, slightly down from its 30-year high of 7.8% in the quarter ending December 2022. Ouch!

Inflated prices mean your money is literally worth less; you have to spend more to purchase the same amount. And if your paycheque hasn’t increased at all, then you’re feeling the pinch of inflation. No matter how you look at it, that sucks. 

While it may feel like the increasing interest rates adds insult to injury, the rate increase is meant to help cool down the economy and slow the inflation rate. The rationale is that making the cost of borrowing money more expensive will prevent some folks from borrowing money to grow their businesses and overall slow down consumer spending. This, in turn, decreases demand and hopefully will stop prices from increasing so rapidly. While this might work in the long run, how can we all survive this squeeze in the short term?

To get through this period of high prices, let’s intentionally focus on our agency and choose what we’ll change when it comes to our behaviour with money. It’s up to you to choose what you will shift. It sounds like you’ve already changed how you shop for groceries since you mentioned only buying what you need. I’d also recommend stocking up on-sale items if you have the space and ability to keep them on hand. For example, stocking up on dry goods like pasta or rice or buying meat when it’s on sale and freezing it. If you haven’t yet, perhaps explore finding alternatives at a lower price, like at grocery outlets and bulk stores.

When I was struggling financially and trying to save money on food, I began shopping at different stores. I found some food sold at a steep discount because it was close to expiring. I found better prices shopping at ​​smaller regional chain stores that specialise in a particular cuisine or sell ingredients from a specific part of the world. And I did supplement my groceries by growing some of my own food, but I don’t know if the savings were worth all the effort I had to put in. And I know not everyone will have the space or the time to grow their own vegetables.

There are corporations that are raising their prices not because their costs are going up, but because they see this as an opportunity to pad their profits. If you suspect a company of doing this, one way to encourage them to bring their price back down is to curb our demand for that product: cut back or stop buying it. As consumers, we can exercise our purchasing power and influence manufacturers and retailers by saying no to expensive purchases or choosing lower-priced alternatives. 

Outside of grocery shopping, keep a buy list of things you’d like to purchase so you can prioritise purchases that are necessary while still making room for purchases that bring you joy. Check out buy nothing groups on Facebook or via the Buy Nothing Project, or tap your community of friends to borrow things instead of buying your own.

When I first read your question, my immediate reaction was to tell you to focus on the income side of your personal finance equation. I tend to focus on the income side of things because I work for myself, and it’s an aspect of my finances that I have autonomy over. I also under-earned for years, so when I got on the other side of that issue and earned more, it solved many of my financial problems. I know that increasing income might not be possible for everyone, but I do think it’s important to at least do the mental exercise of considering it as an option. 

In the aftermath of the global financial crisis and recently, during the early days of the pandemic, a lot of people didn't have a choice but to consume less; they had to get back to basics, which is not a bad thing. When you spend time doing very basic things — like having picnics in the park, making food, gardening, staring at the clouds, and reading a book from the library under a shady tree — you'll spend less while also having a chance to connect with the simpler things. 

It might seem really silly of me to ask you to find ways to appreciate the little things. But every day, if you can try to find at least three things in your life you truly feel grateful for, you’re choosing to focus on what you have instead of what you lack. Punctuating your life with these moments of appreciation and gratitude can make a difference in how you feel. This practice is simple, like drinking enough water every day or regularly getting enough sleep, but it’s not always easy. Please don’t underestimate how seemingly simple things can have an outsized impact on your well-being.

Take a step back to craft your long-term financial plan. Part of the planning process is creating contingency plans and imagining different financial and economic scenarios, from recessions and job loss to unexpected windfalls from an inheritance or outsized investment returns. It also involves assessing ways you may be financially fragile or vulnerable to future financial shocks. Knowing these vulnerabilities is a good starting point for solving them.

There are plenty of ways you can get started with your plan. One way is to get individual help. There are various financial planners and advisers that can create a plan for you. Although prices vary, this is likely the most costly approach. The opposite end of the spectrum is a DIY approach.

Here are some ways to take a look at your financial position:

1. Reevaluate your spending plan. What are your essential monthly costs? What are the priorities, where do you spend the most, and what can you negotiate?
2. How much can you expect in monthly income (wages, unemployment, aid, assistance, etc.) for the next one to six months? What are realistic ways to increase your monthly income? What can you do in the short-term and the long term?
3. How much do you have in your emergency fund (cash reserves) to bridge any gaps in your essential costs and inflows? Evaluate how comfortable you are with how long those reserves will last you.
4. Review your debts and if you can afford to continue to pay them for the foreseeable future.
5. Evaluate your current employment situation at the company and industry level. If you lost your job, what would be your biggest financial concern? For example, having health insurance might be someone’s first priority, while falling behind on debt payments might be someone else’s.

As you go through the list, you’ll likely find yourself feeling more concerned about one area over another. Take the time to double-click on it and prioritise creating a plan and making changes. It’s easy to get overwhelmed with all the changes you want to make. Remember to focus on one thing at a time.

Rising costs are really putting the squeeze on many of us these days. And it can be challenging to navigate these kinds of choices, but I’m glad you asked about decision-making because I do want to address it from a larger perspective.

Improving how you make financial decisions is important because, unlike inflation, interest rates, and economic cycles, our decisions are within our control. It’s one area in which we have agency so it’s important to make sure we’re acting in our best interest as much as possible.

There are two parts to good decision-making. 

The first is to avoid making decisions when you’re stressed or anxious. Try to make sure you’re in a calm, collected state of mind before you make a decision. This state is important because when you are stressed, anxious, or too caught up in your emotions, you risk making a decision that is reactive rather than coming from a place of critical, pragmatic thinking. So before you go shopping, make sure you’re not upset or anxious. Think the opposite of retail therapy.

Understand what actions you can take to put yourself into a serene state of mind where your emotions feel balanced. Sometimes, you’ll need to get amped up by listening to upbeat music, jumping up and down, or splashing cold water on your face. Other times, the opposite approach might be what you need. For example, taking a few deep breaths, doing a short meditation, or lighting a candle might be ways to get into a calm state. 

The second part of good decision-making is using a process or model. I recommend using second-order thinking, which is a way to look beyond the immediate results of a decision and to consider the long-term and indirect consequences. For each financial decision you face, simply consider how each choice will affect you long after you’ve made it.

For example, let’s say you’re trying to decide whether or not to spend money on a fuel-efficient car. While you might save on gas in the short term, a second-order thinker would also weigh factors like how a car loan would impact their finances and overall debt load. They would also weigh the opportunity cost of putting money down for a car as well as how future technological advancements could reduce the price of the car in the next couple of years. By thinking about these indirect effects, you can make a more informed decision about whether getting that new car is truly worth it. 

Although this economic moment is painful, remember to focus on the things within your control. Be willing to experiment with changes and remember that the modern economy moves in cycles, from good times to bad and back to good again. 

Your friend in finance,

Paco