What’s your personal rate of inflation?

Your personal rate of inflation defined

Let’s ask the basic, simple question – what does your personal rate of inflation even mean? Simply put, it means while the broad economy may have had a certain rate of inflation, your personal rate of inflation might be different because of the basket of goods and services you purchase. Your personal rate can be higher or lower than that of the broader economy. So for eg. even though the broader economy inflation index is at 8%, your personal rate might be much higher at 15% or something lower like 3%. How could that be? Well, its because of your personal lifestyle and the mix of what you purchased the prior year. All this sounds simple and obvious so far.

How do I calculate my personal rate of inflation?

This is going to be a simple answer as long as you are someone who tracks your expenses regularly. If you don’t, then this will be a bit more difficult and less accurate.  

To calculate your personal rate of inflation, simply subtract your current full year’s expenses from last year’s full expenses and divide it by last year’s expense. Multiply this by 100 to get a %.

Personal rate of inflation = [(Current year expenses – Prior year expenses) / (Prior year expenses)] *100

Your time period should be comparing apples to apples – meaning you want to ideally use a calendar year from Jan – Dec or the same 12 months compared to prior 12 months.

So what if I don’t really track my expenses?

Then, this is not as easy. You will need to do some work here. But you can keep it simple too. I will explain the simple way and the more detailed way.

• The very simple and basic way (will take around 10 to 15 min) – this won’t be super accurate but if you have nothing, this is not a bad way to eye ball your expenses. Identify the bank account(s) that you use to pay your expenses and your credit cards. This assumes all your expenses are coming through the cash from your bank eventually. Your bank statements will have debits and credits. Your debits are all your expenses. Your credits are whatever income came into the bank account. (If you don’t understand what debits and credits are, don’t worry – just look up your bank statement and you will see items under ‘debit’ and items under ‘credit’). So, you need to find the sum of all debits for all the months in the specific year and that will basically tell you the total expenses for the year. Once you have this, you calculate your personal rate of inflation by using the formula I explained in the previous section. If you don’t want to look at expenses by category, then this is pretty good. But if you wish to get into more detail by categories, then you will need to do it the way I explain in the next bullet.
• Getting more detail of your expenses by category (takes 3-6 hours depending on how detailed you want to get) You will need to look at both your credit card statements and your bank accounts. Set up a spreadsheet with the categories you wish to track – don’t put too many categories. Try to keep it simple if you are doing this for the first time by keeping no more than 5-10 categories max. Next, take your credit card statements and bank account statements and start going through them one by one and categorizing the expenses. If this sounds painful, I can tell you it is. Its way easier if you have a system set up on something like Mint.com or even if you use a spreadsheet but doing it every month. Personally, I track every month through mint.com but I also maintain a google sheets where I track expenses and income each month.

My own example on our personal rate of inflation

I am not someone who typically shares my own numbers but in order to make this real and also to make some of you feel better about your own expenses 😊, I am going to share high level %s. In 2021, coming out of the pandemic, we were still spending lesser than what we were spending pre-pandemic. In 2022, we went back to pre-pandemic level spending (and more) with all the inflation we saw.

In 2022, our full year expenses were around 17% higher than 2021. Wow!! That hurts! If at this point, you are like – I am going to stop reading this blog because this dude who preaches to us about personal finance can’t keep a lid on his own expenses, I don’t blame you 😊. But, as I dug through specific categories, I found increases and decreases in certain categories. Since we moved to new home in Nov 2021, our housing expenses went up around 14%. We had not done any travel in 2020 and 2021 so we decided to travel much more in 2022 and travel expenses as a result were significantly higher at 75%! 😊. Food and dining also went up – almost 22% but that’s also because we hardly ate out in 2020 and 2021 and as we traveled more, we ended up eating out more. The grocery inflation is also real here – I could see it every time I went to the grocery store!

So that was our year in a nutshell. The reason I shared the above numbers was because I wanted to explain how the personal rate of inflation can be very different from the CPI inflation numbers because of lifestyle choices and when you dig this deep, you can figure out where you can make changes in the coming year. It is very important to understand this, in this level of detail, if you want to take some action on how to control your expenses. I talk about how you do this in my article “How do you Marie-Kondo those expenses”. As I reflect on 2022, my view is that a lot of the decisions were made eyes-wide-open and intentionally. We wanted to spend on the things we valued (and have been fortunate to have the ability to do so) so we did it. Inflation happened and for sure, we were impacted by it like everyone else. But as I see the numbers, I also know the big increases were intentional choices we made.

Concluding comments

If you cannot measure something, you cannot improve it. That’s fundamental. You don’t have to a rocket science or a math major to understand that. So first step is for you to track your income and expenses. I explain that in one of my earlier articles “If you cant measure it, you cant improve it.”. But after you do that, you need to decide what actions you want to take. If you don’t take any actions, then this exercise did not accomplish much other than making you aware. Now, if you are on track and where you want to be and want to maintain what you are doing, that is also a form of action.

Thank you for reading. I wish you success in your financial journey!