• Tuesday, July 23, 2024

# What is your personal inflation rate?

Inflation is a word that is commonly used, but a lot of people are not familiar with the concept of personal inflation rate.

A country’s rate of inflation shows how general prices are rising as a whole, but this figure does not reflect the real impact on an individual level.

While the country’s inflation rate is published month after month, each individual has a personal rate of inflation that is representative of their specific spending habits.

Individual lifestyles, choices, and how we choose to spend our money will determine what each person’s personal rate of inflation will be, and it is very important to understand how the general increase in the cost of living affects you.

When teaching personal finance, principles are highlighted, but it comes down to each person to determine how they spend their money. The risks and rewards of personal financial management are largely individual.

Let’s take a deeper look at this.

Inflation is described as the general increase in prices of goods and services within an economy over time, as well as a fall in the purchasing value of money.

The rate of inflation in Nigeria was 19.64% for the month of July.

How do we then decide your personal rate of inflation between July 2021 and July 2022?

The good thing about this exercise is that it also helps you realize the aspects of your personal finances that you should pay more attention to.

We will do that in a very simple exercise listed below.

Add up your monthly spending for July 2022 and July 2021. (Do you have records? Do you work with a budget? Do you regularly review your budget?)

Ascertain the difference between your overall monthly spending for July 2021 and July 2022.

Now divide the difference in step 2 by your monthly expenses for July 2021, and multiply that by a hundred.

Whatever you get is your personal inflation rate.

I will provide some figures to drive this home.

Last year, Oliver, a single guy living in the Mainland area of Lagos, had total expenses of N250,000 for July 2021.

These expenses included his monthly food, rent, electricity bills, telephone charges, cost of eating out, gym subscription and other monthly expenses.

He typically uses a budgeting app to budget and log his actual spending. The reason he is able to make a comparative analysis for the two years.

His monthly expenses for July 2022 were calculated as N352,000 because of the apparent increase in the prices of goods and services.

The equation is therefore calculated as (N352,000-N250000)/N250,000.

His personal inflation rate comes out at 40.8%.

So, whilst the national inflation rate for the country in July 2022 was 19.64%, Oliver’s personal inflation rate was 40.8%.

What an interesting discovery.

Generally, if you spend relatively more on items with low price rises, you will have a lower personal rate of inflation than the national average rate, and if you spend relatively more on items with large price rises, you will have a higher personal rate of inflation than the national average rate.

What are the critical take-home points from this quick exercise?

Interact with your finances, and keep records of your figures. It says a lot about your finances and will help with planning for the future.

Oliver needs to realise the need for an additional income, or how does he justify a 40% increase in his expenses without a corresponding income raise?

There is the concept of the national economy, but your personal economy has to do with how you make and manage your money.

If the items you spend on have low price increases, you will likely have a lower personal rate of inflation than the national inflation rate, and if your expenses are more on items with significant price rises, your personal inflation rate will be higher than that of the national inflation rate.

In conclusion, please bear in mind that your personal rate of inflation reflects how an increase in goods and services personally affects you, irrespective of the national inflation figure.