It's easy to get stuck in our spending habits. We don't give them much thought and they become automatic. There's nothing wrong with spending your money, but if you want to spend more mindfully, it helps to understand your habits. Finance writer G.E. Miller suggests calculating your "personal inflation rate". Money image from Shutterstock
You can probably imagine what this concept is in action, but as Miller explains, it basically involves taking the economic concept of inflation and applying it to your own spending. Here's how he suggests calculating this rate:
Personal inflation rate = cost of all personal expenses in most recent year/cost of all personal expenses in year prior
Here's an example in action:
- Your 2015 expenses totaled $51,000
- Your 2014 expenses totaled $50,000
- Your personal inflation rate = $51,000/$50,000 = 1.02 (or, 2%)
I do this personal inflation rate exercise annually because it helps me keep track of my consumption habits at a granular level and notice the long-term trends...If you're not careful, the insurance, grocery, dining out, travel, entertainment, and miscellaneous categories can really sneak up on you and lead to lifestyle inflation as your income grows.
This metric offers useful insight into your finances. You can compare against salary increases, your savings rate or even just the actual Consumer Price Index so you can make more mindful money decisions.
Miller has also created a spreadsheet to help you calculate your rate. Check it out, along with more detail on this concept, at his article below.
Personal Inflation Rate: the Metric that Helps Limit Lifestyle Inflation [20SomethingFinance]