Let’s face it – these high prices are getting tough on the pocketbook.  Unfortunately, it just doesn’t seem like there is any relief in sight.  As consumers, what are we to do?  If this is starting to have a negative effect on your cash-flow, there really are only three options.  First, cut back on expenses.  Second, work additional hours or get a second job.

Third, look to the credit cards.

The third option is out.  For most people, the second option is out.  So, the most logical option is to cut back on expenses.

In order to adjust to higher prices, there are two main steps to take.

Step 1 – Guard Yourself against Complacency

We have turned into a nation of complacent consumers. It is easy to be complacent.  As a country, it has been a long-time since we have faced tough economic times.  As horrific as 9/11 was for the United States, economically we only faced a mild recession.

The Government has supplied us with ample amounts of credit through credit cards and the equity in our homes.  Most recently the Government is trying to bail out the consumer with rebate checks.  We continue to dodge economic bullets in this country.  Consumer spending has stayed strong for decades.

So, if economic situations really never get that bad and the Government is going to figure out a way to bail everyone out, there really isn’t any real danger.  As a result, there is no motivation to be proactive and change the way money is being spent.

What about high oil prices?  What about the real estate crisis?  The Government is working on that as well and the politicians say everything is OK.

Why not be complacent?  We have the Government as the ultimate back-up plan.  The Government didn’t let the devastation from 9/11 harm us economically.  So, why worry this time?  There are no worries.  Go back to sleep America!!

What most American consumers don’t understand is that there is a huge future cost to Government bail-outs.  Guess what, we are facing our future and paying that cost.  As a result, it will be tough for the Government to continue the free lunch program.

This false sense of security has made the American consumer complacent with no real sense of urgency and ill-prepared for the potential of tough economic times.

Who knows what the future holds?  At the same time, no one has the luxury of being complacent.  So, it is time to be proactive.

Step 2 – Hope for the Best and Prepare for the Worst

Regardless of what this country faces economically, consumers must hope for the best and prepare for the worst. I have always said that if one can look at the worst case scenario and have a game plan, then the worst case scenario is survivable.  Without preparation, there could be real problems.

Would you rather depend on a bunch of out-of-touch politicians to take care of you or take care of yourself?

Politicians are scrambling right now which is a sign that they are running out of ammo.

So, how do you prepare for the worst?

Track, Anticipate, and Plan

Step 1 – Start tracking expenses

This helps with the prospects of guarding against complacency.  It is tough to be complacent when one knows where the money is going each month.  Tracking of expenses is a discipline.  It is also a discipline that has the power to change spending habits.  It creates reality.

It is tough to rationalize eating out every meal when you see the cost and then realize the cost savings by cooking at home.  It also gets rid of the “disconnect” between wants, needs, and spending.  Many times we spend money on what we want rather than what we need.  When the wants get more priority than the needs, debt is created.

You might want to spend your rebate check on that Plasma for your living room.  You might need to save that rebate check to make sure that you are able to continue to absorb the high cost of gas.  Gas is a necessity.  Watching NBA basketball or American Idol on the big screen does not get you to and from work.

Set time each week to track your expenses.

Step 2 - Anticipate your expenses for the next month

Look forward to the next month and determine ahead of time the out of the ordinary expenses that will occur.  Those out of the ordinary expenses will be there like it or not.  Thus, you have to anticipate and plan for them.

Anticipate expenses such as birthdays, potential car repairs, home maintenance items, medical expenses, etc.  Obviously unexpected expenses will happen and there is very little you can do.  However, there are expenses that we know are coming and yet we do nothing to plan for them.  By not anticipating and planning ahead, those expenses will more than likely just add to the credit card balance.

Step 3 – Plan on how you are going to make your income work

You have all of the information that you need.  You now can differentiate between needs and wants.  You know what out of the ordinary expenses are coming up.  You know how much money is coming in during the month.  Now, you can plan for those additional costs.

High gas and food prices are a reality.  Face reality head on by being proactive and prepared.  The price of being proactive is time and making tough choices.  The price of being complacent is credit card debt.  It shouldn’t be a tough choice.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.