Thursday, December 1 2022

Cost of living: Your personal family inflation rate can be very different from the national figure calculated monthly in the Consumer Price Index (Photograph by Mario Proenca/Bloomberg)

Dear readers: two opinions!

• April is Financial Literacy Month in Bermuda and the US and UK with Financial Awareness Days in April and May (Financial Literacy Month in Canada is November).

• I am running a financial literacy essay contest for five age groups of Bermuda residents – see full details and how to apply in the document under “Related Media” on this webpage.

Writing this week’s article, the concerns listed below can absorb so much more than a 1,000-word article, so rather than repeating yourself about budgeting, keeping control of your money with so many ‘uncertainty beyond your control, we’ll discuss these six concepts below over the next four weeks of Financial Literacy Month.

The personal impact of global and possible economic responses of de-globalization to the ongoing Ukrainian invasion, inflation on consumer budgets, savings plans, interest rates, investments, risk protection and daily lifestyles.

World inflation

Global monetary talk of impending inflation is on the rise. After reviewing over 21 years of my articles for The Royal Gazette, there still seem to be concerns about inflation, for example, exacerbated during the subprime mortgage crisis over 15 years ago (2007). The central banks of the countries, the Federal Reserve, etc., will use the financial tools at their disposal to control the escalation of prices.

One wonders if inflation is just a fact of life, when one revisits basic economic theory – that when demand exceeds supply, prices rise and when supply exceeds demand, prices fall. Economics is never that simple, however, the intricacies of external factors, shipping, labor, energy transportation, countries’ regulatory and customs processes, the interdependence of centers of production of various countries and now the war sanctions, can go some way to explaining that even when the demand remains quite stable, the same goods and services are constrained so that the prices will go up anyway.

Country inflation

The Bermuda Government Department of Statistics publishes the monthly Consumer Price Index based on nine expenditure groups:

• Food

• Lease

• Clothes and shoes

• Tobacco and alcohol

• Fuel and electricity

• Transport and vehicles

• Household goods, services and communications

• Education, leisure, entertainment and reading

• Health and personal care

December 2021 indicated a decrease month-over-month, but noted that from the April 2015 basket cost of $100, in six years, the basket index now cost $108.60, an overall statistic at the country level.

Your personal inflation rate can be, and probably is, completely different and higher as well.

Personal inflation

Inflation is often quoted in general average terms as to its impact on a population as a whole. It generally does not break down the actual monetary cost of purchasing goods and services on a personal level. Try the Family Inflation Calculator.

Make the cost of living very real (and surprising to many families) by calculating personal family expenses as a percentage of the overall income level of family earners.

You can calculate as follows using the simple table (see attachment under “Related Media” on this webpage). Please email me if you would like a copy.

Keep in mind that these numbers are estimates! I don’t know what your costs are, only you know.

This is how it works.

The first step: list monthly your estimates for food, utilities, transportation, health and care insurance, education, housing, and more.

Second step : estimate each of these cost categories as a percentage of your total net pay by dividing each by your total net pay.

Third step: estimate in percentages how much you think the different cost categories have increased year over year. Check my math too!

Fourth step: Now multiply that percentage by your estimate of the percentage cost increase due to inflation.

Complicated? Too much like the homework you hated as a teenager.

You are right! We will do the calculations for you.

In this example, the family earns a modest salary, but inflation knows no sympathy, impacting them nonetheless.

We are all affected by inflation to some degree, but those who work so hard to climb the ladder of financial success are much more affected. This family’s personal inflation rate takes a bigger chunk out of their family budget than it would from a family earning more.

When financial survival depends on career success, how can anyone have the time or energy to consider alternative strategies to minimize the effect of dwindling dollars, and then incorporate those strategies into the family plan?

Inflation is an indiscriminate and unofficial tax that, even with forward planning, cannot be completely eliminated.

Not exactly the best way to manage a family budget. As with any business – and managing a family budget is a business – there are always two tough choices:

• Reduce your expenses according to the rate of inflation

• Increase your income.

This purchasing philosophy only works as long as you:

• Have a job in a growing industry

• Have a job that offers incremental increases above the rate of inflation

• Have a job that helps you improve your education and professional skills

• Can control price increases of all your expenses, a challenge in any economy.

Remove one of these factors and inflation creep erodes your daily dollar every day.

Bermuda Islanders are used to supply chain disruptions, natural and otherwise. Nothing new at all, being located remotely at the end of the global supply line. We’ve developed and refined a 400-year-old treasure trove of ingenuity, innovation and survival skills.

We know how to manage.

So, now, we have to relearn to deal with it, to preserve our way of life.

It’s time to install some clotheslines to save energy costs, consider eating your lawn and maybe catching a few of those wild chickens, if allowed in your housing complex. Readers, nothing facetious in any of these remarks.

Next week: interest rate, savings, credit.

Do not forget ! April is Financial Literacy Month which promotes financial well-being around the world with the seven basic concepts: earn, spend, save, invest, borrow, protect, give back and most importantly, increase financial literacy by understanding the economic environment of your community/country.

Martha Harris Myron is a former qualified international financial planner and author of Amazon and Apple Books published The Bermuda Islander Financial Planning Primers Series. Book One – The Dawn of a New Beginning: A Financial Examination of the Basics to Dramatically Improve Your Lifestyle. Contact: [email protected]

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