When Prices Rise: Living on Your Income

Debra Pankow, Family Economics Specialist, North Dakota State University
Elizabeth Gorham, Extension Family Resource Management Specialist, South Dakota State University

FE-1377 , July 2008

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An increase in the price of goods and services can be traumatic. When you have to pay more for things such as gasoline, food and health care, other difficulties may arise, especially if you are retired and/or are living on a fixed income. Realizing that your income does not go as far as it used to, even in covering just the basics, can be alarming.

Overall price increases often are due to an increase in the price of one essential product. An increase in the price of that essential product may trigger an increase in the price of other products and services. For example, an increase in the price of a barrel of oil may result in an increase in the price of gas at the pump, which, in turn, may help increase transportation and heating and cooling costs. As price increases continue, feeling the effects personally doesn't take long, perhaps even to the extent that you have little or no discretionary funds and/or you strain to pay all your bills.

When prices rise, don't panic, but don't become complacent, either. Don't stop credit payments or ignore the fact that you are facing financial difficulties. You need to adjust your spending and develop a spending plan (budget) to pay bills. Your financial affairs are still within your control. Surviving a financial crisis will take work and planning, but it can be done -- and you even may come out stronger when the crisis over. Make an action plan as soon as possible.

Remember

• You can control your financial situation if you plan carefully.
• Communicate with your family. Together, analyze what is important and decide on a plan of action.
• Examine your expenditures. Be prepared to change your standard of living, at least temporarily, so you don't have to give up essentials.
• Don't default on payments. Contact your creditors, explain your situation and work with them to make adjustments. Some creditors may have hardship programs for those experiencing financial duress. You may qualify for those programs.
• Begin to make plans for the future. Adjust to a reduced standard of living.

Prices are noticeably higher. What do I do first?

Jot down how you spend your income. If you do not already have a good idea of how you spend your income, track your spending for a month or two. This will give you a good idea about where you will be able to make changes in your spending habits. (See "Methods for Tracking Expenses.")

Separate your family living expenses into fixed and variable (flexible) expenditures. Examples of fixed expenses include mortgage payments or rent, installment credit payments, deposits into emergency savings, medical and/or life insurance payments, and utility payments (if on an equal payment plan). Examples of flexible expenses include spending on gasoline, recreation, leisure, food, clothing and personal care. The family can examine flexible expenses especially for cuts that can be made when times are tough. Perhaps family members are meeting wants instead of needs.Can less expensive brands or items be used?

If you are unsure how to plan for your expenses on a short-, medium- and/or long-term basis, the Family Money Manager publication (www.ext.nodak.edu/extpubs/yf/fammgmt/fe222w.htm) has worksheets, suggestions and additional resources that may help.

Methods for Tracking Expenses

• Envelope method -- Strictly uses cash. Less secure than other methods, but it is the easiest. Separate envelopes used for each budget category (for example, housing, transportation, food, entertainment, personal care, phone, miscellaneous).
• Receipt/account book method -- All family members collect receipts to be placed in a designated container. All receipted amounts are placed on a ledger at the end of the month.
• Checkbook method -- Expenses are recorded only one time. It is easy to use, but one must remember to record transactions. All cash purchases; must be recorded.
• Budget register method -- More complicated than other methods, but it handles all transactions (for example, cash, check, deposits, withdrawals, credit payments). It is a compact record that goes with you.
• Software/online methods -- Examples are Mvelopes.com, Excel Spreadsheet, My Money and Quicken.

Examine Your Expenditures

Your expenditures hold the key to how well you do when dollars are scarce. If your family does not follow a spending plan, this is the time to start. Family input is essential, as is being both realistic and flexible. Be creative about how to cut expenditures. Remember, you want to survive comfortably. Here are some suggestions:

• Before making purchases above a certain dollar amount, discuss the potential purchase with other family members.
• Control impulse buying. Make a shopping list and weigh the importance of each item.
• Practice effective consumer skills. Comparison shop. Examine the specials. Use coupons. Go to price-competitive stores. Buy in bulk. Look for cash discounts. Shop at thrift or discount stores.
• Engage in in-home production. Exchange goods and services where possible. Use free or low-cost community services.
• Postpone the purchases of noncritical items (for example, furniture, flat-screen television or remodeling plans) if possible. Although prices may be tempting at end-of-season or out-of-season sales, carefully consider the purchase of something out of season (for example, a snow shovel in the spring) to ensure that you have the funds necessary for the current season's necessities. Stop buying on credit.
• Do not drop insurance coverage. The need for insurance is magnified by the stress you may be experiencing. However, if you have several policies, make sure that you are not paying for duplicate coverage.
• Do not cancel essential medical and dental appointments. Canceling such appointments may prove to be more costly long term. Some medical and dental professionals may be willing to negotiate payment schedules if details are worked out in advance.

Management Strategies

Be a smart shopper. Resolve to prioritize and focus on needs, not wants.

Conserve resources by using them wisely. Make your home energy efficient; consolidate shopping trips to the store.

Become more resourceful. Consider planting your own garden; cook items from scratch; offer your services for hire.

Which bills should you pay first?

If you can pay some bills but not all, set priorities. After paying for secured loans and basic essentials, pay those bills that:

• maintain vital services (for example, utility, phone, transportation, insurance)
• have the highest interest rate
• cost the most to delay (for example, bills that carry late penalties or may lead to repossession or disconnect/reconnect charges)
• may be collected vigorously

Be wary of quick, short-term, high-interest loans. If you miss just one payment, you could become saddled with a long-term, high-interest debt payments that seemingly never ends. Here is an example of this type of debt: Paying off a $500 loan by making 22 monthly payments of $68 will cost $1,453 (with $953 spent on interest, the interest rate is about 150 percent).

Bankruptcy is not a good option. Financial institutions also are affected by economic issues, and as the funds they have available for loans become restricted, a good credit report for those wanting to borrow money becomes more essential.

Management Tools

Take an inventory of your resources. To help monitor your financial progress, you can use a tool such as the "Family Balance Sheet" (www.ag.ndsu.edu/pubs/yf/fammgmt/fe222c.pdf) to help figure your assets, liabilities and net worth.

Emergency savings are essential. Those attempting to get out of debt may fail to realize that they should have emergency funds available. These funds may help ensure that a debt repayment plan does not have to be postponed for unexpected household or other emergency expenditures.

Reduce consumer debt. Don't ignore your monthly payments on outstanding loans. Make a list of all your debts. Include in that list each debt's annual percentage rate, the specific terms of the contract and any finance charges. Analyze your debt payment options by utilizing a program such as the online program PowerPay (https://powerpay.org). Determine how much you owe to each creditor, then print out a plan for making power payments until you are completely out of debt. Continue making payments to build up your emergency savings to a minimum of three months of expenses.

References and additional consumer help

Check Register Tracking System (HE-471). North Dakota State University Extension Service. Fargo. Available from state specialist.

Gorham, E. What to Do When Your Income Drops (FS-912). South Dakota State University Extension. Brookings. 2006. http://agbiopubs.sdstate.edu/articles/FS912.pdf

Household Account Book (EC 916). South Dakota State University Extension. Brookings. 2004. http://agbiopubs.sdstate.edu/articles/EC916.pdf

Miner, D.F. Jr., and J. Harris. PowerPay: Helping debtors become savers. 2001. https://powerpay.org/

Pankow, D. Financial Term Guide (FE-222a). North Dakota State University Extension Service. Fargo. 2004. www.ag.ndsu.edu/pubs/yf/fammgmt/fe222a.htm

Spending Forecast (FE-222b). North Dakota State University Extension Service. Fargo. 2004. www.ag.ndsu.edu/pubs/yf/fammgmt/fe222b.pdf

Family Balance Sheet (FE-222c). North Dakota State University Extension Service. Fargo. 2004. www.ag.ndsu.edu/pubs/yf/fammgmt/fe222c.pdf

Bankruptcy and the Alternatives (FE-273). North Dakota State University Extension Service. Fargo. 1998. www.ag.ndsu.edu/pubs/yf/fammgmt/he273w.htm

What to Do When Your Income Drops (FE-274). North Dakota State University Extension Service. Fargo. 2001. www.ag.ndsu.edu/pubs/yf/fammgmt/fe274.pdf

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