Friday, November 23, 2012

My Inflation Hedge

The Chicago Transit Authority is at it again. This time their latest proposal on the table has their 30 day unlimited use pass, my transit option of choice, to go up to $100 from its current price tag of $86. So this scenario caused me to evaluate my sensitivity to rising inflation. To do this I pulled back to look at our monthly household budget to see where we are currently allocating our spending. Plus it gives me insight to see the impacts of rising costs onto our overall budget.

For starters my wife and I both use unlimited 30 day CTA passes. My wife buys her monthly pass with after tax dollars. Through my employer I can purchase my 30 day pass with pre-tax dollars. So instantly the increase of $14 in the monthly fare reduces my taxable income by that same amount. Sure, I’m paying more for the pass to the CTA, but in using pretax dollars I am paying less to the government in order to buy the CTA pass. Speaking in after tax dollars, I need to make about $134 to be able to bring home enough to buy the CTA pass ($134 taxed at 25% leaves me with just enough to buy a $100 transit pass). With pretax dollars I only need to make $100 to buy the $100 pass, and again, my taxable income goes down with every purchase.

 But I feel that we are in an excellent position to be able to take on cost of living increases. We have no debt payments and honestly live on about $22,000 a year. Below is a cute little pie chart that reflects our monetary priorities. We budget and plan every penny we expect to earn every month before the month begins. Every cent is categorized and allocated before it ever hits our bank accounts. So based on net income, these percentages are what we are prioritizing during the month of November within our household.

A few points of clarification first though. As of January 1 we will be raising our “Giving” category to 10%. For the last quarter of 2012 we have consciously chose to take this category down in amount. Also the largest chunk, “Discretionary Spending/Saving,” is primarily made up of our savings towards our first home together and future travel. There’s some other miscellaneous items in there like mani/pedi, budgeted spontaneity and date nights, but the meat and potatoes of that category is for our future home and for future travel. On the retirement front for the past few years I had been contributing 15% of my gross income to retirement and my wife 12%. As of November 1, 2012 we drew a line in the sand and have agreed for the next 2 years we will only contribute to our retirement through my wife’s 401(k) and will max out her match which is 100% up to 6%. We are doing this to in essence play, “hurry up offense” to pay cash for our first home faster. Once the home is purchased we will both go back to contributing 15% towards retirement.

But back to the point. Based on this chart I don’t feel that a $28 increase (for my wife and I) impacts our bottom line month to month. Now yes, if this increase remains steady year after year for over a decade it may become advantageous for us to buy a car. But for now the increase really doesn’t change our bottom line. The price increase does not affect our standard of living. But do not let that leave you to think that I am unsympathetic. I can see how, in being saddled with monthly debt payments and being in a situation where you have more month than money, that a price increase of this nature could affect your bottom line and be a big hairy deal. That’s even more reason why I advocate to become debt free and get monthly debt payments out of your life forever.

Even looking at my chart there are plenty of places for our money to go around before debt or dreaming even enters the picture. For us rent, insurance premiums, groceries, going out money, clothing, utility bills and transit passes are priorities for us every month. On top of that we are planning to travel and purchase our first home in the next 2 years. To me debt payments rob you of the flexibility to dictate where your money goes every month and create household budgeting headaches when the evil monster known as inflation rears its ugly head.

So I will conclude with this outrageous assertion. Being debt free has given me the strength and ability to rip inflation to pieces with my bare hands. It will do the same for you J!

P.S. Here’s an unrelated funny comic I found that I find particularly amusing. And although not directly related to this post, I am not above taking a shot at Bernanke when presented with the opportunity, even if indirectly related.  

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