2022 will be remembered as the year inflation came back to bite.

After decades of moderate price rises, the cost of living has spiralled. In Australia and New Zealand, annual inflation sits in excess of 7%, while the UK rate has climbed to more than 10%.

Last week’s Australian federal budget laid out the stark reality of the problem. Wages are forecast to increase over the coming year, but they won’t keep up with inflation. On average, people will continue to grow worse off. 

With disposable income drying up, millions of households head into Christmas with severely reduced purchasing power.

There’s no escaping this reality, but how we react to it matters greatly.

Take, for instance, an annual family holiday. Many people will have booked to go away this summer but have yet to pay for it. In years past, the holiday ‘decision’ may have simply been “where should we go?”

This year’s decision suddenly becomes: “Should we go on holiday at all?”

While it might seem like the two scenarios are worlds apart. The only difference is the context.

Context matters

Having waited all year for the chance to get away, the thought of cancelling the much-anticipated family holiday is heart-braking. However, in such an emotional environment, we can make a bad situation worse by focusing on the problem rather than the decision process.

Imagine we can’t face the thought of not going away. We keep our booking, press ahead, and go into debt to cover the cost. Alternatively, we’re terrified about the financial outlook and immediately cancel our booking.

Neither decision is necessarily wrong. However, when we focus on the problem rather than the process, we risk under and over-reactions. An under-reaction blindly presses ahead with the holiday booking and risks placing us in crippling debt. An overreaction would involve acting too hastily and doing ourselves out of a much-needed break we didn’t have to forgo.

What matters is making a decision we can live with, and we do this by starting with the question: “where do we spend our money?”

Let’s say, for instance; a holiday costs $2000. Considering the economic context, we should ask two critical questions: Where else could or should that money be spent and do I even have that money in the first place?

The context, in effect, changes from a how question to a where question. We no longer ask how do we get to go on our holiday. Instead, where is the money coming from, or should I spend it elsewhere?

Scarcity forces us into a position of understanding trade-offs. Once we understand that reality, we can assess the situation within a broader framework. We can see all the choices over the months ahead and begin to work toward a decision with which we can be happy.

Importantly those trade-offs can be both tangible and intangible. Hard to quantify for sure, but we shouldn’t discount that there could be costs to our health and happiness should we cancel our holiday.

Having weighed up the trade-offs and consulted our family members, we can begin to arrive at a decision proportionate to the broader financial reality.

Most importantly, by following these decision-thinking principles, our choices are more likely to stick and won’t have us second-guessing or living with regret.

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