How to Calculate Your Personal Inflation Rate and Why You Should

The nation’s inflation rate is a top news story, as it’s a key indicator of how much the average American spends compared to the previous year. But is the national average inflation rate that economists calculate enough to help guide your personal finances?

While it’s a solid barometer, the national average inflation rate doesn’t show the financial nuances of your region. In calculating your personal inflation rate, you can see how your spending compares to last year. This can help you make adjustments and plan for future changes.

Below, we’ll cover:

• How to calculate your personal inflation rate

• Why it matters

• How to tweak it when it grows too much

How to calculate your personal inflation rate

Calculating your personal inflation rate is relatively simple with the right tools and information. 

Start with a spreadsheet or piece of paper and write down spending categories. Here are some of the categories you might include, but you can also create your own: 

• Transportation

• Housing

• Childcare

• Clothing

• Food and beverages

• Medical care

• Recreation 

• Education

• Communication

Now, let’s say you want to compare October 2022 to October 2021:

1. Collect credit card and bank statements from October 2021

2. Categorize all the transactions. Add the amount to their respective category on your paper or spreadsheet 

3. Add all the categories to get last year’s monthly expenses for October

4. Find your most recent bank and credit card statements from October 2022 and calculate all the same categories you did from the previous year 

5. Add those together to come up with your current monthly expenses

6. Consider any larger bills you pay on a cadence other than monthly, such as quarterly automobile insurance or something similar. Break these down into monthly costs from last year and this year and add them into their respective categories

7. For quarterly payments, divide one payment by three to get the monthly cost. For biannual or annual, divide the payment by six or 12 months, respectively.

8. Subtract last year’s monthly expenses from this year’s expenses, then divide the result by last year’s monthly expenses. Multiply this result by 100 to get your annual inflation rate expressed as a percentage.

If your total monthly expenses last year were $4,000, and this year they were $4,250, your personal inflation rate would be 6.25%. Here’s the math:

$4,250 - $4,000 = $250

$250 / $4,000 = 0.0625

0.0625 x 100 = 6.25% (personal inflation rate)

Why track your personal inflation rate

The U.S. Bureau of Labor Statistics (BLS) is already tracking the national inflation rate and Consumer Price Index (CPI), so what’s the point of Americans having personal inflation calculators? Here are a few reasons you may want to calculate and track your personal inflation rate.

You’re not the national average

The BLS inflation rate is the national average, and there’s a good chance you’re not the average. Maybe housing costs rose faster in your area compared to the rest of the country or gas prices are higher in your region than others. If you only followed the national inflation rate, you may have missed these important shifts and not accounted for them.

It helps you budget

Knowing the ebb and flow of prices and your spending helps make changes as you see pricing and spending shifts. You can also catch items with upward-trending costs that you may no longer need and can cut completely from your household budget.

It aids in retirement planning

For retirees, looking at your personal inflation rate can help you better predict how long your money will last. You can compare your personal inflation to any Social Security cost of living adjustment (COLA) that year to see if the adjustment is sufficient in your case. If not, you may need to tweak your budget by cutting expenditures to allow your retirement savings to stretch further.

How to lower your personal inflation rate

While you won’t align perfectly with the national inflation rate, you shouldn’t be too far off from the average. If your personal rate of inflation is several percentage points higher than the average, you’ll want to look into what’s causing the issue and adjust your spending patterns to compensate.

Here are some ways to adjust your spending to lower your personal inflation rate.

Trim the fat

Run through your monthly budget and look for areas to cut without significantly impacting your day-to-day living. Some ways to trim without impacting your daily life are:

• Cellphone service, an unlimited data plan could be overpaying if you’re not a heavy data user. Look at your data usage trend and see if downgrading to a plan with a data cap will work for you and reduce your expenses.

• Unused streaming services are easy to overlook. Maybe you forgot you signed up for a free trial, and now you’re paying several dollars monthly for something you never use. Search for these services in your monthly statements and cancel them.

• Energy bills are quick fixes. If you feel hot during the summertime, try turning on a ceiling fan instead of lowering the temperature on your air conditioning — a fan uses only 10% of the energy of an air conditioner and makes a room feel 10 degrees cooler. You can also switch all the bulbs in your house to LEDs, which use 75% less energy and last 25 times longer than incandescent bulbs.

• Fuel costs can be a massive expense. With quick trips, the car never reaches optimal operating temperature and doesn’t run at peak efficiency. Instead of firing up the engine, walk or ride a bike to the store, if there’s a safe path.

Pay off high-interest debt

High-interest debt can exceed 20% interest. If you carry a high balance on high-interest credit accounts, you can spend hundreds of dollars monthly on interest charges. By paying down these accounts, you can free up more money for your other expenses.

Consider downsizing

Is rent spiraling out of control in your area, causing your monthly spending to go through the roof? If your lease is ending soon, consider downsizing or seeking roommates. This will not only decrease — or at least stabilize — your rent costs, but it may also lower your utility costs.

Adjust spending habits

Maybe you just suffer from a bad case of “gotta have it” and struggle with impulse spending. This can cause your own personal inflation rate to creep upward without you noticing. Once you check your personal inflation rate and see your recreational spending has been creeping up over the past year, you can act.

Put this spending in check by creating a firm recreational spending budget and sticking with it. You can even try the envelope budget, where you put a set amount of cash in an envelope for recreational spending. Once that cash runs out, you can’t spend more until the next month.

Calculate your personal inflation rate and help your budget

It’s tempting to just look at the national average inflation rate and assume your expenses trend the same way. However, given financial situations and cost differences between areas, it’s unlikely your inflation rate is average.

By comparing last year’s monthly expenses to this year’s monthly expenses, you can determine your personal inflation rate and compare it to the national average. If it’s abnormally high, you can adjust your budget to bring it down.

Are credit card bills and their interest charges making it hard to lower your personal inflation rate? The Tally† credit card debt repayment app can help you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.