Budgeting for the cost-of-living crisis

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I’ve recorded my spending since I started at university as a student over forty years ago. I used notebooks and cashbooks back then, but I now have just over twenty-five years of computerised records. This has required a bit of work to maintain to say the least, but it is a useful source of data. In order to manage your spending, you need to understand where the money goes. With much talk of a cost-of-living crisis and annual inflation seemingly headed to 10% I’ve been looking at our family spending.

In preparing my tax return for the year ended 5 April 2022 I produced an income and expenditure report. There are 75 income transactions, and 1,113 expenditure transactions. I analysed the spending as follows:

Chart by Visualizer

Essential spending

I then analysed essential spending as follows:

Chart by Visualizer

Groceries, tax and utilities are the biggest three items and amount to three-quarters of essential spending.

We aim to do one weekly shop online to cover our grocery needs for a family of four. We use one of the top four supermarkets and pay for a delivery plan. We mostly avoid premium brands and buy supermarket own brands. We sense check all items costing over £2 when we receive the delivery. We try and avoid any top up shopping and mostly manage to do that. We have a reward card but we don’t chase coupons or offers. Aside from that I’m not sure what else we can do to reduce grocery costs. We don’t yet see any large rise in our grocery costs this year.

Tax is mostly Council tax and that has risen by 4.11% this year which is now below inflation. We did challenge the valuation band for our house many years ago, as suggested by the Money Saving Expert website, but were unsuccessful. Our house was sold around the time of the valuation in 1991 and that supported it staying in the higher band.

Utilities are mostly electricity and gas. After several years of switching energy providers, and maybe saving 25% on our bills, I now feel we are prisoners of the forces at work in the international energy market. The last two such providers went bust last year and we are now on the capped tariff of one of the larger providers and expecting to pay about double what we used to pay until the next price rise. It may rise next in October to be three times what we paid one year ago. It may even exceed 10% of our total spending. It shouldn’t exceed 10% of our income so we won’t be regarded as in energy poverty! Currently, our direct debit varies each month dependent on the meter readings we send. April energy cost twice that of last April. Other utilities are phones, internet, and water. We pay £30 per month for the internet and phone line, and £26 per month in total for four mobile phones. I don’t think we can save much here. Our water charges are based on metered usage and despite being a family of four are less than half what our water rates used to be.

Transport costs include for motor car services, motor fuel, and transport fares. This area is difficult to budget for. Last year we had our biggest ever car service bill. The car is over 17 years old with over 100,000 miles on the clock so perhaps we should expect more of the same, or else we will have to buy a new car. Increased petrol prices shouldn’t be too onerous for us as our annual mileage has been rather low in recent years. Transport fares are local journeys at little cost.

Household costs include general household expenses, insurances and home repairs. I use a price comparison site each year on the renewal of our buildings, contents and motor insurance. That has kept them reasonable in recent years. Otherwise, this area is difficult to budget for. For instance, we had four home repair jobs last year but next year we might have none.

I think our essential spending is under control, but there is little scope to avoid increases in grocery costs, and next to no scope to avoid increased energy costs. I’m not counting on any government energy cost help reaching us.

Discretionary spending

The biggest discretionary spend is contributing to Junior ISA accounts for our two children. That would be the biggest “saving” we could make if we felt had to reduce or stop those, but it would be costly for the children’s future.

Other items here include home improvements, new electrical goods and new furniture items. Having bought a new cooker, new washing machine, and new bedroom furniture for the children’s rooms last year, maybe we will spend less this year. Alternatively, there could be new one-off projects to do on the house or garden (or a new car).

Charity donations and investment research costs are also included here. These could be reduced but they are not significant.

Overall, this area of discretionary spending is the one where we could make big cut-backs if we need to and mostly without any impact on our current lifestyle.

Luxury spending

The biggest item here is luxury goods such as books, magazines, newspapers, and music CD’s. That could be cut back significantly as there are plenty of past purchases to read or listen to. Subscriptions we have to the Readly app and the Apple One account also provide plenty to read or listen to. I am reluctant to cut back because these are my interests and my indulgences.

The next biggest is dining. That is quite high and it is likely to remain at this level unless we do less. It includes spending at restaurants, at pubs, on takeaways, and at coffee shops. It also includes school dinners that should probably be included in essentials.

Third biggest is holidays. It is lower than before the lockdown so it is likely to rise in the next year as we are able and want to do more.

Fourth biggest is entertainment. This is also lower than before lockdown and likely to rise if we go out more to concerts, theatres and cinemas. Subscriptions such as Netflix are included here but are relatively minor costs compared to a concert ticket or even cinema tickets for the whole family.

Other luxury spending is rather low and could easily rise a bit but it is not significant to our total spending.

Overall luxury spending is a bit down because of the restrictions imposed in the past year and it is likely to rise this year. I am reluctant to try to reduce it because of its contribution to our quality of life. I could, however, change the spending mix a little say by spending less on books and more on holidays.

Investment Income

Our total spending has reduced as a percentage of our available investment income in recent years. That trend could go into reverse. Future changes in that income are impacted by the economic situation of our investments and whether and by how much dividends are increased or reduced. They are also affected by investment choices I make. I have recently held my income steady by switching a small part of my portfolio into growth holdings that pay less income whenever total income rose. I will likely pause this soon to allow the dividend income I receive to increase. Even if dividends aren’t increased, I can still grow income by reinvesting some income in more shares so long as income continues to exceed expenditure.

Conclusion

We will continue our current approach on grocery spending and it will be interesting to observe what inflation rate I can calculate. We will have to endure the energy price rises but will keep an eye on what Money Saving Expert Martin Lewis has to say about any steps we can take. I will look to reduce luxury goods spending including any subscriptions we can give up. We will aim to continue with our other luxury spending such as on holidays and eating out. We will consider carefully any discretionary spending we want to spend on the house. If necessary, we can reduce our Junior ISA contributions, but we may need to, or choose to, accept a higher level of total spending. With that possibility in mind, I will be considering how to again grow the investment income we receive. I feel that despite being in drawdown we will be in a better position than many other families.

6 Replies to “Budgeting for the cost-of-living crisis”

  1. Interesting analysis – which seems to suggest you have plenty of scope for paring things back were it to become necessary.

    Personally, I have always found the essential/discretionary split difficult. I know that there are several text book definitions – which are broadly along the lines you have used – but to me they just feel too harsh; the question I ask is would/could we really willingly not purchase these so called discretionary items. And more often than than not the answer is: no!
    What I have done though is view our average spending for 2020 and 2021 (ie pandemic spending) as our essentials baseline – howsoever it is actually made up.

    We talked some time back about gas/electric and whilst we too went through the drawn-out hassle of our supplier going bust – in the end we did manage to secure a two year fixed price deal with one of the big six that has more than a year still to run. For the time being this has sheltered us from this storm – which is good as we are now, and always have been, fairly large energy users.
    The upshot of which means that in reality for this year, at least, the majority of the prices driving the inflation uplift (BoE reckons some 80% of current excess inflation is due to energy price inflation and goods) will not impact us. Of course, worst case, this would just be a delay, but best case it might all just wash through entirely – only time will tell.

  2. Thanks for your comment. I agree that spending that is regarded as discretionary or luxury can be seen as more essential when faced with the choice of actually not spending it! I think, however, I can reduce things a bit if I feel I need to. On gas and electric I’ve never opted for a fixed deal and always preferred a variable one. You did well to pick up a fixed deal at the right time. A delay of more than a year is useful, although I think these costs will remain high or higher.

    • Wiggle room is always important!
      Re: gas & electric: we have been using fixed deals for some time now and started doing so many years before the current crisis. I am fairly sure that we have won some and lost some. I have always taken the presence (or absence) of email alerts from uswitch (and the like) saying you could save X (and the size of X) as being a pretty good indicator of the current status.
      We definitely got lucky this time and the previous supplier going bust may, in the final analysis, have actually helped – which, of course, was totally unforeseen at the time. Something about silver linings and clouds rings a bell.
      I suspect your prognosis may turn out to be correct and we may have to revisit our strategy at the next renewal – time will tell.

      • Thanks for commenting. My approach to gas and electric was to follow Money Saving Expert and his Cheap Energy Club and to switch every year or every two years and I think we probably saved about 20% against standard prices for over ten years. We didn’t switch on every alert or even every year. We had a good run but now it’s over! Your good run has a bit more to go.

        • Indeed, all good runs come to an end, and this one probably will too with a thumping uplift!
          Thanks for explaining your approach. I suppose this means you have had a fair bit of experience with changing suppliers. I have always found changing to be much less straightforward than advertised and have grown to enjoy (ahem??) the mental gymnastics required to work out each new suppliers billing systems, and other assorted wheezes, etc. Personally, I have come to accept this as the cost for changing and always tell friends to factor this into any decisions they may make regarding changing suppliers. From such discussions it would appear that my experience is far from unusual.
          May I ask, how have you you found changing suppliers?

  3. Thanks for your question. I have mostly found changing suppliers pretty straightforward. I did have to make an occasional phone call to suppliers to sort something out. I generally looked for established companies with OK feedback so I didn’t always buy the absolute cheapest. We didn’t switch every year if the price differential was low. When asked I submitted monthly meter readings so the direct debit didn’t result in too high a surplus or deficit. I felt my time was well spent in getting maybe a 20%+ reduction in one of our biggest essential costs.
    My earlier blogpost covers our experience in managing energy costs up to 2019:
    https://gettingminted.com/our-friends-electric-and-gas/

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