Time to Tighten the Belt
by Amy Burns
Anyone exposed to the media knows that the last year has been grim for our economy. Foreclosures are at record highs. Home values have dropped. Fuel prices are up, which, in turn, have driven up food prices. The so-called experts are finally issuing warnings that America's economy, which is largely consumer-spending driven, is looking rough.
As consumers divert more and more of their incomes to necessities like mortgage payments, food and utilities, they will probably spend less on clothing and entertainment. The heady days of tapping the home equity for extra cash and switching from one low interest rate card to another are over for the foreseeable future. Inflation is rising; the dollar is falling.
But we're frugal, right? We're ready for a recession, aren't we? Many of us feel that there are no notches left on our financial belt. How do you squeeze any more juice out of the lemon?
The bad news is that we're probably going to have to poke another hole in our belts. The good news is, if you're reading this article, in all likelihood you can tighten your belt even more. You've already tapped into one of the larger sources of frugal information, The Dollar Stretcher.
Whether or not the economy actually recedes, it's a good idea to have a plan for tougher times. It's easy to know what to do if you have some extra money. But how would you react if you had to spend much more that we are now on food and fuel? Could you do it creating debt or adding to already existing debt?
I came up with a quick and dirty way to figure out whether we could handle higher costs on our current income. I figured out our expenses as close to the penny as possible, including annual expenses.
Then I bumped up those expenses by 15%. Why 15%? Inflation hit over 13% in 1980 according to the Federal Reserve Bank of Minneapolis. I think 15% prepares me for a pretty negative scenario.
Can you cover 15% annual inflation on your current income? What would you have to give up? For some lucky people, the answer is nothing. For others, it means making it but not getting ahead with savings or debt repayment. And for many, it means adding to already existing debt.
If you are like most people, you need a plan to deal with 15% inflation.
First, assess what you do have. Look at your income, emergency savings, a full pantry, employable skills, and/or things you can sell, including overly expensive cars or even a house.
Second, assess what you can cut in your budget. Groceries are almost always the easiest category in which to cut spending. Entertainment costs can often go way down. There will be no more eating out or Blockbuster four nights a week. Cable is a big bill for many people. Could you live without the service or cut it back? What about gas costs? Can you combine trips? Buy in bulk? Grow a garden? Thrift shop or swap kids clothes with friends?
If you need to, figure out what you can defer. Student loans are often deferrable in case of financial hardship. This will add to total debt, but not as much as if you were paying them with a credit card.
Third, realize that hard times are hard times and call for hard measures. If you've got to scrape it down to the barrel to stay afloat, you may need to mentally prepare yourself for a certain amount of self-denial. What inexpensive, yet satisfying luxuries can you substitute for more costly pleasures?
Figure out just how far you'd have to tighten the belt and make a plan. If we do see significant inflation, you've done what you can to prepare. If the economy defies the odds and improves, you're ahead of the curve.
Amy Burns is a stay-at-home mother of two young children. Having recently survived a move from the Southwest to the much more expensive Windy City, she is enjoying applying frugal living techniques in a new environment.
Take the Next Step:
- Figure out how far you'd have to tighten the belt if we were to see 15% inflation. Then have a plan. Are there any areas in your budget that you can cut down to size?
- Budgeting Made Easy! Visit spendtrackerusa.com. Exclusive Dollar Stretcher readers' discount: $5 OFF (use coupon code: STRETCH5)
- Need more ideas on how to cut expenses? Look for "Inflation Fighters" in the Dollar Stretcher email newsletters, our Community Forum and on the Dollar Stretcher website. Here at the Dollar Stretcher we can't lower prices for you, but we can show you how to substitute a cheaper product, use less of a product or find it for the best price possible. All those things will reduce the effect of inflation on your family.
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Also In This Week's Issue
- Documents you need when disaster strikes
- Where are all the fixed-rate credit cards?
- 5 scary paths that lead to damaging debt
- 6 steps to a successful money talk with your mate
- 5 steps to boost your savings account
- 8 signs you're flirting with financial ruin
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