COST OF LIVING CRISIS

Cost of Living Crisis: Seeing the Forest, Not the Trees

By Benji Landau

After a couple of rollercoaster years, the dust of COVID-19 seemed to finally be settling, and its global financial fall-out fading into oblivion. But before we had a chance to catch our breath, the cost of living crisis arrived and for many of us, it was very much a case of falling out of the frying pan into the fire. Today, prices are rising at an unprecedented rate — A ostensibly caused by factors out of our control, such as the inaccessibility of Ukrainian grain and the boycott on Russian fuel. As a result, a large number of families find themselves desperately struggling to keep their finances in the black.

URGENCY

The urgency of the situation compels us to find ways to cut back, now. Many of us zero in on one specific expense or another, slashing at “individual trees,” without looking at the “forest.” But these kinds of cutbacks can often prove ineffective at best, and counterproductive at worst.

Extreme measures that lower our standard of living typically do not endure. In addition, arbitrary cuts do not always take into consideration the impact on individual members of the family or on the general mood of the home. If we want our streamlining efforts to be successful, it’s crucial to get the entire family on board and to work together with a positive mindset. Ideally, we need to have a careful strategy in place that considers the knock-on effect of our choices. Driving fifteen minutes out of the way to get cheaper petrol may save a few pounds, whilst giving us a feeling of complacency that leads us to make unbudgeted impulse purchases.

Undertaking to bake challah instead of buying it may seem a thrifty choice, but may take up billable working time, or drain us of valuable headspace and affect our mental health and wellbeing.

Joining a rota to get the kids to and from school to save money on the costly school bus service may leave you so wiped out and time-poor that you find yourself buying take-away dinners at a hefty price instead of cooking supper.

Consider the following examples:

So, what’s the solution? How can we know which cutbacks will get us balanced financially and which will merely make things worse? And how can we determine how much our spending needs to be trimmed in order to ease the financial crunch?

ZOOM OUT

It’s time to widen your view and look at the bigger picture of your finances. Once you have the entire “forest” spread out before you, it will be much clearer which “trees” to target in order to get your finances on an even keel. Granted, this requires a bit of time and record-keeping work, but it is really quite easy. Put simply, we need to determine how much money is coming into the home, how much is going out, and where that money is going. Here is a quick “how-to”:

Step One – Determine Income

Record your monthly household income. Income includes wages for regular work, money from extra jobs, investment earnings, benefits, and interest. Then, add in income that’s earned annually such as dividends, gifts and periodic work. Divide this annual income by 12 and add it to the figure for monthly income.

Step Two – Track Expenses

Write down everything your family spends for a period of two to three months. Use bills, invoices, bank statements and credit card statements to help you document transactions. Keep a small notebook handy to jot down cash purchases that do not appear in these documents.

Step Three – Calculate Expenses

Now take the data you’ve accumulated and organise the expenses into different categories:

Fixed monthly expenses

(such as rent or mortgage and school fees)

Fluctuating monthly expenses

(such as utilities and groceries)

Periodic/annual expenses

(such as Pesach costs or summer holidays)

To figure out your total average monthly expenditure, start by adding up your fixed monthly expenses and average fluctuating monthly expenses. Then add up your periodic and annual expenses, divide by 12 and add it to the first amount. That should give you a reasonable approximation of how much money you spend in an average month. Finally, pad out your average by 5 to 10% to cover unanticipated or unbudgeted expenses. Now, compare the figure for your average monthly income and the figure for your average monthly expenditures. What you should be left with is your monthly surplus or shortfall. Make sure it looks and feels right, and if not, go through the steps again to make sure there were no mistakes made along the way.

WHAT ARE THE BENEFITS?

At first glance, you may feel that this process doesn’t actually provide any solution. After all, the only noticeable change will be knowing how challenging the situation is, which is more likely to increase anxiety than to improve the situation! But, in fact, for most people, this simple process of creating a financial snapshot is eye-opening and empowering, and provides several clear benefits:

CLARITY: Even if the monthly “balance” turns out to be a clear shortfall, just knowing how much the shortfall is can be reassuring. You are no longer swimming in a mire of uncertainty; the number is quantifiable. CONTROL: Knowing where you stand also gives you a greater feeling of control. Awareness of the exact discrepancy between income and expenditure gives you a defined goal and helps you make smarter spending decisions. DIRECTION: In the process of recording all these details, some overspending habits automatically emerge and it will become obvious where you can streamline without overly straining your quality of life. OPTIONS: Once you have the numbers laid out in front of you, you can more easily consider your options. Perhaps, instead of covering that sum by lowering expenses, you might be able to enhance your income in some way — taking on extra hours at work, requesting a deserved raise, or developing an unrealised talent into a side job that can bring in remuneration.

In short, getting the whole picture actually lowers your stress level and opens your horizons.

We’re in for some challenging times ahead – of that there can be no doubt. But the more prepared we are, the better equipped we’ll be to weather the storm. See the forest – and you won’t be overwhelmed by the trees!

Benji Landau is the Executive Director of Mesila UK. Mesila tackles issues of financial hardship within the Jewish community, typically caused by high cost of living and financial mismanagement. They do this through one-to-one financial coaching, educational initiatives such as webinars, and regular social media content including videos and infographics.