5 ways to manage when income is tight

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Getting by when money is tight
Here are some ideas to help you take control of your finances if it feels that your money's not going as far as you need it to.

Key points

  • Clearly define what's most important to you, then structure your spending and saving around those priorities
  • Begin with small changes. This will encourage you to keep going while you develop new ways of thinking about your finances.
  • Use debt purposefully; managing your debt can be one of the most effective ways to reduce expenses and make up for lower income
  • Use the Merrill Edge Cash Flow Calculator to track monthly expenses and income
Although we're in the seventh year of economic recovery, wage growth for most Americans has remained stubbornly flat.Footnote 1 Meanwhile, even though inflation is relatively low, the prices for some things we regularly have to pay for, such as health care, continue to creep up. As a result, many of us are left feeling that our paychecks have to stretch further and further each month.
However, there are a number of ways you can compensate to keep your budget in the black. To start with, take a good, hard look at your discretionary spending, and draw a clear line between "wants" and "needs." Shopping around for good deals and avoiding new debt may also be part of a solution. But the most successful way to start addressing your financial challenges may simply be to change how you think about them, says Karen Burns, head of goals-based wealth management consulting, Merrill Lynch.
"Focus on how you can empower yourself by taking control of your finances in a positive way," Burns says. That involves defining what's most important to you and structuring your spending and saving around those priorities, she says. Consider these five approaches for adjusting both your mindset and your money habits.

1. Start small and work your way up

Whatever changes you make, don't try to do everything at once, Burns warns. A good strategy is to begin by listing concrete steps to reduce expenses and manage your debt. Then start checking off some of the easier ones first, building slowly toward larger objectives.
"Taking slow steps forward is not only empowering, it is often the only way to actually make something happen and make it last," Burns says.
Watch 'How to set a budget and stick to it'

2. Ask family and friends for ideas and support

Talk about money with people you trust — your spouse or other loved ones or friends. It may not be easy, "but being transparent about your financial situation is one of the most important steps toward improving it," Burns says. You might consider carpooling with neighbors or having a potluck get-together instead of going out to dinner.
"There are many opportunities to become more social around this common objective," Burns says.
See how you stack up when it comes to household expenses

3. Prioritize your savings goals and investment strategies

It can be difficult saving for a comfortable retirement while also balancing more near-term goals such as:
  • Paying off student debt
  • Saving for a child's education
  • Assisting with health care expenses for an aging parent
Because you may not be able to do everything, it's important to be clear about your priorities. When money is tight, consider some short-term trade-offs. For example, if your company matches your 401(k) contributions, you could consider a temporary cut-back on what you pay to a college savings plan or charity. Then use that money to increase contributions to your 401(k) so you can earn the full match.

4. Spend according to your needs, not your wants

Distinguishing between need-to-haves and want-to-haves will always be a little subjective, Burns says, but it pays to take the time to decide what really adds meaning to your life. Consider the usual advice to give up a few small luxuries you don't genuinely need. Suppose each week you skip a couple of purchases you'd ordinarily make: two lunches out, two bottles of water and two cups of coffee, at a cost of roughly $25. If you invested that amount and earned an average annual return of 6%, you could end up with $69,646 after 25 years.Footnote 2
Watch 'Easy ways to save money on monthly bills'
The point, says Burns, is to cut back judiciously and to take satisfaction in gaining control over your finances.

5. Use debt purposefully

Borrowing money can be positive or negative, depending at least on why you do it. Consider a decision to use a credit card to buy a new suit. Is it for an interview to get a better job that could enhance your financial well-being? Or do you just want something new to wear to your cousin's wedding? "Same purchase, different purpose," Burns says.
Similarly, it's important to distinguish between the kinds of debt you take on. For example, high-interest credit cards can create a financial drain. Only making the minimum payment on a card that charges 15% interest is very expensive for the benefit received. Your mortgage debt, on the other hand, may allow you to reduce your federal taxes by deducting the mortgage interest you pay, while also providing the opportunity to own a potentially valuable asset.Footnote 3 Although interest rates have started to go up, they remain low by historical standards, so now may be a good time to consider refinancing your mortgage. Plus, rising home values could make it easier to obtain a loan.
Finally, remember that even if your income is creeping up at only a snail's pace, that's just part of the equation for your personal success and well-being. "What's really important is to be in control of your financial life and to take satisfaction from living within your means," Burns says.
Next steps

Footnote 1 Economic Policy Institute, Nominal Wage Tracker, October 2016.

Footnote 2 Assumes four weekly contributions per month at an annual rate of return of 6%, compounded monthly for the stated number of years. Prices for goods based on 2014 U.S. averages assume $1.38/cup of brewed coffee, $10/lunch eaten out, $1.45/bottle of water.

Footnote 3 This information is for illustrative purposes only. It is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.