Deflating your historical spending using inflation data makes it easier to interpret over time, especially during times like these when inflation is in flux. Central banks’ policies of maintaining a low level of inflation over time means that you should expect your budget to slowly increase over time as well, but this compounding effect is not easy to mentally estimate over longer periods of time.
If one is able to spend less over time in real (inflation-adjusted) terms, this indicates progress towards reducing expenses and retaining more of their wealth, assuming that their wages roughly track inflation.
How to adjust your historical spending for inflation
The first thing that you will need is a collection of various data points of your budget over time. Since I’ve done a full spending and budget review of my average monthly expenses every 6 months starting in 2019, I now have a few years of data collected. Here are my initial inputs:
|Date||Average Monthly Spending, Past 6 Months|
|December 2019||No Data|
It’s clear that even in nominal terms, my spending is lower than when I first started this blog, showing some of my success in reducing my expenses. I expect to see even better results after deflating these numbers!
The second thing that you will need is a reliable source of historical inflation data. For Americans, the Bureau of Labor Statistics maintains the Consumer Price Index as a measure of inflation.
The simplest approach here is to just use the BLS’s own CPI Inflation Calculator. Since June 2019 is my earliest data point, I will be comparing all of my other spending data to June 2019 buying power as my baseline. For example, $2,609.69 in December 2022 had the same buying power as $2,252.23 in June 2019. I will maintain this June 2019 reference point to assess the cumulative effects of inflation over time.
If you’re looking for more of a challenge and want to calculate inflation manually, you can set up a present value calculation for that purpose. The BLS maintains historical CPI data tables here, and by clicking the “more formatting options” link on that page you have several options for customizing the CPI data prior to downloading.
The nerdiest and most accurate method would be downloading CPI data for each major group of consumer expenditures (e.g. food, fuel, shelter) and prorating these to your personal spending, effectively creating your own personal inflation index. If you don’t do this, you’re just accepting the category weights from the typical urban consumer as representative of your spending, which is probably a good enough assumption for most of us.
Since I’m short on time and only have a handful of data points, I’m just going to use the calculator.
My results and interpretation
After deflating my historical spending data back to June 2019 buying power, I collected the data in another column on my spreadsheet and created a graph containing both data series:
Cool! We can see that the gap between my nominal and inflation-adjusted spending grows over time, which is an expected result due to the compounding nature of inflation. The cumulative rate of inflation between June 2019 and December 2022 was 15.87%.
It’s also interesting to me that the final 3 data points (representing my most recent 18 months of collected spending data) are within a rather tight spread of just 3% deviation after adjusting for inflation, indicating that my spending was fairly consistent over this time period. When one has reduced their expenses to the maximum amount reasonably possible or desirable, holding a budget steady in real terms should be the next goal.
Now that I have this spreadsheet and chart set up, I can come back and update it every so often when I want to visualize my historical spending in the context of inflation. I might actually add this chart to my twice-annual budget review to give each post some historical context, since it won’t take me more than a couple of minutes to update it.
I know that my expenses will be rising at the next budget review due to our recent home purchase, but if I can keep the inflation-adjusted figure below $3,162 per month that will mean that I’m still spending less in real terms than when I started this blog! Since my income growth has slightly outpaced inflation over that period as well, that’s a second factor accelerating my FIRE progress.
Since many of us pursuing financial independence love collecting data and metrics over time to evaluate our progress, I think that this is a useful one to add to your spreadsheet!