How to deal with the financial stress from increased cost of living pressures
Australia is in the grips of cost-of-living crisis which poses a threat to the financial stability of many, with high levels of financial stress almost guaranteed for millions experiencing rising costs.
Escalating prices for fuel, groceries and rapidly climbing interest rates mean that the sustained historic period of low interest rates and slow price growth is officially over.
The Reserve Bank of Australia raised the cash rate by 50 bps to 0.85 per cent during its June 2022 meeting. This was the first back-to-back rate hike in 12 years.
Over the twelve months to the March 2022 quarter, the Consumer Price Index rose 5.1 per cent, the fastest rate of increase for 20 years in Australia.
It’s expected to climb higher still.
Fuel costs were up 11 per cent, housing up 6 per cent and groceries up 5.3 per cent.
Education costs and household services and equipment also spiked in the past year.
Reserve Bank of Australia governor Philip Lowe publicly said he expects the inflation rate to hit 7 per cent by the end of 2022.
At a household level, this macroeconomic data is merely confirmation of what we know from first-hand experience: our living costs have grown sharply.
The cost of living and financial stress
For many people, managing money can be stressful, but it becomes even more so when money is tight in a household.
“Fear, anxiety, and depression can all creep into a relationship with money when finances are tight,” said money educator Lea Clothier.
It can also cause conflict in relationships where couples are feeling stressed by their financial situation and unable to get on the same page with their finances or communicate about it.
Financial stress can affect people’s self-esteem, and their mental well-being, and cause insomnia, anxiety and depression.
“This will have an impact on someone’s health, overall well-being and ability to function in their day-to-day lives,” Ms Clothier said.
Financial stress is also a cause of lost productivity in the workplace.
There are several studies that show the lost number of days that people have due to financial stress and/or worrying about their finances.
The cost of living and financial well-being
Our ability to stick to savings goals and plans are major building blocks in our financial well-being.
Rising living costs, with expenses like groceries, petrol, rent, mortgages and other loan repayments, can cause financial stress and can detract from our savings goals and plans.
When costs increase, we have two main options – earn more money, or spend less.
Rising costs of living will ultimately result in people having less spare cash to save or make additional debt repayments.
Which costs do we need to be especially mindful about?
Energy and fuel are some of the biggest expenses for business and families.
Fuel costs impact on most people, either through what it costs you to fill your tank, to the cost of ride-sharing, cabs or distribution for businesses.
There’s a limit to how transport costs needed to run a business can be reduced.
But at a personal level we can trim costs by using low-cost travel options like public transport and by applying fuel discounts open to consumers.
Rising grocery and energy costs will flow through to increased entertainment costs – in places like restaurants and accommodation.
Unless we can absorb these increased costs, invariably this means cutting back on eating out and entertainment.
How budgeting helps
Budgeting is not a once off event, it is a continuous activity where you are revising and making changes to stay on budget.
‘When you start to fall outside the rails, sometimes because of increased costs, that is when you make the necessary changes before it becomes a problem,’ says FM founder Andrew Fleming.
Revising your budget is very important to keep your household spend manageable.
Your budget should be a ‘live’ document that takes into account your changing circumstances.
So, if your income changes, your budget should be altered. When your costs go up, you must adjust your budget to reflect this.
The main steps to budgeting as we have determined them are:
Step 1: Properly determine your household income;
Step 2: Begin tracking your living expenses;
Step 3: Balance your budget;
Step 4: Go back and review your expenses;
Step 5: Review your income potential; and
Step 6: Balance your budget again.
The weekly reality of staying on track requires that you maintain your budget – that is made up of separate set of actions. The basic steps are:
Step 1: Schedule your budgeting practice;
Step 2: Make budgeting a game that you win at;
Step 3: Review the value of your money and simplify your budgeting;
Step 4: Get smarter about your use of credit;
Step 5: Get real about planning;
Step 6: Experiment with ‘not spending’;
Step 7: Nominate a budget buddy and become accountable; and
Step 8: Become proactive – and stay positive.
Some budgeting tips for 2022
When living costs are increasing in most of our essential expenses it can be difficult to find areas to cut back in a budget.
It can be a good time to review budgets, cutting back on non-essentials (such as shopping, entertainment and dining out) and adopting a savvy mindset to see where you can make savings, for example using fuel discount vouchers, shopping in bulk, and being energy smart to save on electricity costs.
It’s important that people make their savings goals and additional debt repayments an expense item in their budgets, rather than just using what is left over for these.
Otherwise, people will often find that there is no spare money to contribute towards these priorities.
What other spending should you be examining
“A key spend to keep close tabs on is your grocery shopping,” says Andrew Fleming, CEO of Financial Mindfulness.
“You need to avoid buying items you previously have always purchased and find a cheaper alternative. For example, I love iceberg lettuce for my salad but have stopped buying it at $5 and over.
“This item peaked at $12 at stores in some states. Before the recent price increases, it was $2.80 each.
‘My salads now lack the good old iceberg lettuce, but that is ok for now until prices come back. Review all of your shopping items with this mindset.”
It’s worth noting that in the age of consumer choice, the places we relied on to provide value for money are changing.
For instance, there has been coverage in the media lately about the prices of fresh produce in Australia.
Major supermarkets, for so long the paragon of low prices, are no longer guaranteed to offer the lowest prices – despite what their marketing says.
In many cases large suburban greengrocers have enough buying power and discretionary pricing to offer much lower prices on most lines of fresh produce.
Go and do your own research.
Health costs are starting to increase too – though you may be wise to accept these costs with a view to your future.
But we can certainly examine health costs, just as we can examine all costs.
‘These can be as little as the odd extra doctor’s appointment, to mental health plans and the visits to counsellors or psychologists, loss of income due to excessive time off work and lost deposits for holidays that have to be cancelled last minute,’ says Hamish Ferguson, of Financial Mindfulness.
Mr Fleming says review of all your credit products is a good idea to ensure you are not paying too much in fees.
‘If you are paying interest on your credit card, you are really at a disadvantage with the current average credit card rate charging at 19 per cent per annum.
‘Some banks are offering no interest for up to 25 months (including the balance transfer) with a zero per cent purchase offer credit card, that is a big win to help with the cost-of-living pressure.’
How mindful spending can help
Many of our habits with money are automatic, meaning that we’re often managing money in a mind-less way.
‘Financial mindfulness is the act of bringing awareness to the way we interact with our money,’ says Ms Clothier.
‘It’s about paying attention to what is happening in the present moment with your finances.
Stress is often heightened when we project into the future, so keeping our focus on the here and now can help to make finances easier to manage.
That includes becoming stressed about our finances and predicting a catastrophic outcome without discussing options – for instance housing or business repayments.
Financial stress of this type can be so overwhelming that we turn to dysfunctional and unhealthy coping strategies such as gambling or over drinking.
‘It’s about paying attention to and managing your day-to-day spending, tracking your spending, and being mindful in your shopping and spending decisions.’
An element of this is mindful-shopping: be curious about prices, your real needs and aware of both sides of the consumer-retailer relationship.
Ultimately the main point of almost messages about shopping is to encourage you to increase or at least maintain your spending.
“Marketing tactics such as one time only sales offerings, promotions and discounts are all designed to get us to spend big,” says Ms Clothier.
“Tactics such as the use of time, or volume-based limitations and ‘buy now or miss out’ messages create a sense of scarcity and trigger a fear of missing out (FOMO).”
Creating a perception of scarcity is a successful way of making goods and services seem more appealing. Big companies spend millions unlocking the psychology of shoppers, because doing so is worth billions.
Generally, red flags include words, phrases and images such as:
- for a limited time only;
- 24-hour sale;
- don’t miss out; and
- any symbol suggesting a countdown, such as a clock.