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YOU DECIDE: How can you cope with less?

May 30, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

With the inflation rate rising, the stock market bouncing up and down, house sales dropping and the unemployment rate edging up, many households are throwing up their hands and asking, "How do we cope?"

It's little consolation to be told that challenging economic times are usually temporary. Economic slowdowns, or recessions, come about every seven or eight years, last between one and two years, and then fade into the background as the economy's engines restart.

Still, people must make adjustments during the one or two years the economy is on its downside. Are there any recommendations or strategies economists can propose to make these adjustments easier? Here are four this economist will offer.

Prioritize spending. When times get tough, it's time to prioritize. Businesses do this by ranking where their money goes and reducing or eliminating expenditures that are generating low returns.

Households can to the same thing. Make a list of how you spend your money, put the items in order of importance, then reduce or eliminate those at the bottom of the list until your budget is in balance.

Sounds easy, right? But let me warn you - it's not fun. No one - including me - likes to say "no" to themselves. We get used to spending in a certain way, and cutting back means reducing our standard of living. But there's no other way when your budget is under assault.

Substitute spending. There is one way to dull some of the pain of cutting back on less important spending. This is to substitute less expensive items that meet the same need for more expensive ones. So if potatoes have gone up in price less than bread (which they have), and both meet the same nutritional requirement, then buy more potatoes and less bread.

Another good substitution to consider is that of time for money. For example, the cost of a home-made meal is less than that of a restaurant-prepared meal. So if money is tight and food prices are high, one option is to eat at home more and pack lunches for work. Or substitute more time-consuming carpooling and mass transit (if available) for driving alone.

Some substitutes need to be considered very carefully. With rising gas prices, many drivers are thinking of trading in their low-miles-per-gallon truck or SUV for a more fuel-efficient small car or hybrid. But be careful. Sure, the more fuel-efficient vehicle will reduce gas costs. However, make sure those savings aren't eaten up by extra monthly car payments and higher insurance costs.

Consider big changes. Sometimes challenging periods are times to consider big changes. What if you're the first to be laid off from work? Maybe you're always passed over for promotions. Or your daily commute is taking too much time and money.

These can be signs it may not be enough to prioritize spending and make substitutions in your buying patterns. Instead, it may be time to make some fundamental changes to your life. Perhaps consider getting more formal education. In fact, enrollments at universities and colleges usually rise during recessions. And in North Carolina we have the advantage of some of the lowest community college and public university tuitions in the country.

It may also be time to think about where you live. For most people, an obvious way to reduce gas costs is to move closer to work. Of course, this can't be done overnight; moving takes time and planning. Also, there's an important trade-off to consider. Homes and apartments that are closer to workplaces and shopping often cost more per square foot. So to live closer to work, you may have to live in a smaller place.

Watch signals. The economy is constantly sending us signals - signals about what jobs pay more, what investments are good, and what basic necessities cost. Pay attention to these signals, especially when they change. Right now, the dramatic rise in gas prices is sending a very clear signal: Drive less and drive more efficiently so you’ll use less gas. While sometimes we don't like the economic signals we see, most of us will adjust. It's the way we've decided to cope with economic change!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at May 30, 2008 08:00 AM