Buzz
It's easy to fall into automatic spending habits without giving them much consideration. There's no harm in spending money as you do, but for more mindful spending, it helps to understand your patterns. Finance writer G.E. Miller advises calculating your 'personal inflation rate.'
While you might have an idea of what this concept looks like, Miller clarifies that it essentially involves taking the idea of inflation and applying it to your own spending. Here's how he recommends calculating your personal inflation rate:
Personal inflation rate = total cost of personal expenses in the most recent year / total cost of personal expenses in the previous year
Here's an example of this in action:
Your total expenses for 2015 amounted to $51,000
Your total expenses for 2014 were $50,000
Your personal inflation rate = $51,000 / $50,000 = 1.02 (or 2%)
I perform this personal inflation rate calculation annually because it helps me track my spending habits closely and identify long-term trends... If you're not careful, categories like insurance, groceries, dining out, travel, entertainment, and miscellaneous expenses can quietly increase and lead to lifestyle inflation as your income rises.
This metric provides valuable insight into your finances. You can compare it with salary increases, your savings rate, or even the Consumer Price Index to make more thoughtful financial decisions.
Miller has also developed a spreadsheet to assist you in calculating your rate. Check it out, along with more information on this concept, in his article below.
Photo by pictures of money.
