The budget challenge: Coping with rising prices

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Are you setting aside extra savings for price inflation?
Life is getting more expensive every day. How can you revise your budget so it still works for you?
From the Merrill Edge Minute e-newsletter.

Key points

  • You may be more likely to stick with your spending targets if you're realistic about your goals and start with small steps
  • No budget is perfect, be ready to adjust if you fall short of your objectives
  • If you have children, involving them in budgeting could give you good ideas and help them learn valuable lessons
  • Get our budget worksheet
Your expenses probably have gotten a lot higher in recent years: the prices of energy, food, utilities and more have risen. And at the same time, your salary may be stagnant. How can you deal with the imbalance?
First, look at everyday costs and shave what you can. For example, instead of grabbing breakfast on the way to work, have breakfast at home. Eliminate a couple of take-out lunches or dinners each week. It may feel like a stretch for you, but paring back a few small indulgences here and there can make a big difference.
Watch 'How to set a budget and stick to it'
Next, consider revisiting your budget. The idea of budgeting is popular — especially at the beginning of a new year, when possibilities for self-improvement seem limitless. Although most Americans have a budget, many people find it difficult to stick to it.
Reframing the way you approach the budgeting process — including allowing yourself to fail occasionally — can greatly increase the likelihood of bridging that gap between ever-rising prices and flat wages.
Consider these six tips to help you stick with your budget.

Be realistic

Dreaming big can inspire you to do great things. But one sure way to derail your budget is to aim too high — it's probably too ambitious to save enough for a down payment on a house in just one year, for instance. "When you set lofty goals that are not attainable, it can be very demotivating," says Michael Liersch, managing director, head of Behavioral Finance and Goals-Based Consulting at Merrill Lynch. "So you're likely to give up." It's usually better to be realistic about your goals and the types of spending, saving and investing behavior you need to get there.

Be specific and start small

One effective way to reframe your approach may be to look at it in terms of actions, not outcomes. While you'll undoubtedly still think about big-picture goals — such as saving for your dream house — you may be more likely to accomplish them if you first identify three distinct behaviors you'd like to change. For example, you might resolve to resist the temptation to go out to eat on nights when you're too tired to cook. Rate those behavioral changes from easy to difficult and start with the easiest. "Achieving small goals is extraordinarily motivating," says Liersch. "Accomplishing many small goals over time can add up to much larger outcomes than you ever thought possible."

Embrace uncertainty

Prices rise. Raises don't always pan out. Emergencies happen. Life is full of uncertainty, which is why it's so important to understand that a budget devised in January might not make sense come July. So plan to reevaluate your budget every three months. Even if you've fallen short of your budget aspirations, think of your disappointments as opportunities to fine-tune your budget. "There is no need to say, 'I give up,' tear up your budget and never do it again. Adjust and revisit it again next quarter," says Liersch.

Be purposeful

So much spending is routine and necessary — that's why automatic bill pay can make sense. But when spending is more of a choice than a necessity, try to have a purpose every time you pull out your wallet. Instead of thinking about not going to a restaurant as a constraint, you might reframe it as a choice to go out to eat only when you have a specific purpose, such as for a special celebration or to enjoy family time together. "Having a purpose may restrain casual spending and help you save more," says Liersch.

Reward yourself

One reason people don't stick to budgets is because they look at them like crash diets — all sacrifice and no pleasure. To work, budgets shouldn't be that way. Take a portion of the money your budget helped you save and spend it on something you truly enjoy, Liersch suggests. This can reinforce positive feelings toward budgeting and increase your likelihood of success.

Make it a family affair

If you have a family, you can probably imagine this scenario. Mom and Dad sit down with the kids and lay out all the new budget rules: No more movie nights and forget that winter trip to someplace warm. You can imagine how the kids will embrace those edicts — not so eagerly. Instead, involve everyone in the budgeting process and ask for their priorities and savings ideas. Think of it as just one of many Ways to Teach Your Children Financial Responsibility. For instance, when parents plan a vacation with their kids — and openly discuss spending priorities and trade-offs — they are modeling behavior that the kids will need later in life. "Good financial decision-making can be much more impactful when taught by experience and example rather than by dictating," says Liersch.
The lesson that budget is not a dirty word is one everybody could stand to learn. Today, when finding the right balance between spending and available income is harder than ever, a budget you can stick to is a remarkably powerful and satisfying tool.
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