Feeling the pinch? Here are some ways to find savings – and even fight inflation
- Written by George Mihaylov, Senior Lecturer in Finance, Adelaide University
Do you ever feel like everything is getting more expensive, everywhere, all at once? You’re not alone.
Australians have been grappling with a cost-of-living crisis since the pandemic. Last year, it briefly began to look like[1] inflation might finally be coming under control. A few months ago, however, it began to pick up again[2], even before the war in the Middle East sent fuel prices soaring[3].
The Reserve Bank has now lifted interest rates three times this year[4], completely reversing last year’s cuts. Many Australians will be feeling the pinch.
For those who are looking to cut back on their spending, there are some simple strategies for managing the household budget. And no, this won’t just be another lecture on quitting takeaway coffee or cancelling your subscriptions. While that might help, some of the biggest savings can be found in other places.
Needs versus wants
Before we get into cutting back on individual costs, it’s important to understand the difference between discretionary and non-discretionary spending. While there are no universal definitions, the Australian Bureau of Statistics has attempted to separate these categories[5] in the past.
It defines discretionary spending as “optional”, for things like recreation, alcohol and holidays. Non-discretionary spending, on the other hand, relates to items that are considered “essential”, such as food, housing and healthcare.
While it comes as no surprise that the majority of household spending is non-discretionary, it’s worth highlighting the fact that prices are rising at a faster rate[6] for the essentials. Some of the largest savings you can make are on the things you can’t go without.
Avoiding the loyalty tax
Let’s start with paying for a roof over your head and keeping the lights on. Do an audit of your essential bills. Among others, these could include your bills for:
- housing (rent or mortgage)
- utilities (gas and electricity)
- insurance (automotive, home and contents).
In all of these areas, households often face what’s called a “loyalty tax[7]”. In simple terms, this is the extra money you pay by staying with the same service provider for a long time, missing out on cheaper rates or better offers.
In Australia, there is strong evidence[8] to suggest that low-income households – who would benefit most from switching essential service providers – are also the ones least likely to do it.
At any income level, it’s a good financial habit to review your non-discretionary spending regularly. There are various government[9] resources available to help people find and switch[10] to better offers.
And in cases where the switching costs associated with housing, utilities or insurance are just too high, households can look at strategies for saving on other essentials, such as food and groceries[11].
Secondhand shopping and the fight against inflation
What about the non-essentials? Cutting your takeaway coffee[13] or ending your subscriptions[14] can certainly save you money. However, there are potentially even bigger savings to be found in secondhand marketplaces[15].
If you’re managing a strained household budget, secondhand goods offer a great way to cut your spending by getting what you want at heavily discounted prices. More than that, secondhand marketplaces cut both ways – you can be a buyer, but you can also be a seller. Most households are full of old things that aren’t used or wanted, and selling them can help generate additional income.
The sustainability benefits stemming from the circular economy[16] of recycling and reusing old items are obvious.
But the practice might also be anti-inflationary in some small way. It shifts demand away from stores, reducing some of the competitive pressures that underpin rising prices, while at the same time helping households grow their savings.
Just remember to be wary of scams[17] when dealing with online commerce.
A willpower workaround
Remember the “loyalty tax”? It isn’t really about being loyal, it’s about the inertia of not getting around to switching. Service providers don’t keep your business because you keep choosing them – they keep it because you stop choosing.
Automatic bill payments[18] work the same way – once people consent to a direct debit, they rarely cancel the payment. The good news is that you can flip this around on the savings side of the equation to work in your favour.
Once you’ve audited your essentials and substituted secondhand marketplaces for the stores, you can think about the future. Why rely on willpower alone to build your savings? Instead, automate your savings on payday in the same way that you already automate paying your bills.
Banks generally allow you to have multiple accounts at no extra charge. So, consider setting up a small automatic transfer from your main account to a high-interest “rainy day” fund[19]. A precautionary savings buffer is among the best tools households have to ensure financial resilience through difficult times.
References
- ^ began to look like (theconversation.com)
- ^ pick up again (theconversation.com)
- ^ fuel prices soaring (theconversation.com)
- ^ three times this year (theconversation.com)
- ^ separate these categories (www.abs.gov.au)
- ^ prices are rising at a faster rate (www.abs.gov.au)
- ^ loyalty tax (theconversation.com)
- ^ strong evidence (doi.org)
- ^ government (moneysmart.gov.au)
- ^ find and switch (www.energymadeeasy.gov.au)
- ^ food and groceries (theconversation.com)
- ^ Lukas Coch/AAP (photos.aap.com.au)
- ^ takeaway coffee (www.wemoney.com.au)
- ^ subscriptions (www.abc.net.au)
- ^ secondhand marketplaces (theconversation.com)
- ^ circular economy (theconversation.com)
- ^ wary of scams (theconversation.com)
- ^ Automatic bill payments (doi.org)
- ^ fund (moneysmart.gov.au)
Authors: George Mihaylov, Senior Lecturer in Finance, Adelaide University
