You Decide: Where Can We Cut Back?

By Mike Walden

Both of my grandfathers were farmers in southwestern Ohio. One had a hog farm and the other raised beef cows. This was a century ago, and farming then – like now – was very risky and unpredictable. My grandfathers and their families had to be prepared to periodically tighten their belts when adverse economic conditions popped up.

My father didn’t take up farming. After returning from World War II, he trained to become a carpenter, and he stayed in that occupation for over 40 years. I don’t know if he pursued that career to have more stable finances, but if he did, he was wrong. My father typically didn’t have work for several months during Ohio winters. His family – including me – had to hunker down and cut back until he went back to work.

Many households today are faced with a challenging economy. For two years, prices households pay have outpaced the incomes households earn. Simply put, people can’t buy the same amounts of products and services today that they bought two years ago. Standards of living have dropped.

To make matters worse, the job market seems to be weakening, and some economists are predicting unemployment will eventually rise. If this happens, it will put a further strain on household finances.

What can people do? Can economists like me use our training to make any useful recommendations? I think we can.

The first task is to know where you stand, financially speaking. Get pencil and paper together and begin to track where your money is going. Also, tally both the current values of your investments and debts. This information will allow you to see how much of a financial challenge you have.

Now comes the hard part – assuming you have a financial challenge, what do you do? Here’s where some economic principles can help.

One important economic principle is substitution. Simply put, we are constantly looking for ways to meet the same need less expensively. So, when one way becomes costlier, we’ll try to find another way that gives us the same result but at a lower cost.

Let’s say you enjoy eating meat. While meat prices in general have risen during the last two years, some meat prices have risen less than others. Among the top three meats – beef, pork and poultry – beef prices are up 4 percentage points less than pork and 8 percentage points under poultry. Eating more beef and less pork and poultry would therefore help you budget.

One of the biggest changes in eating has been in meal preparation. When I was a child in the 1950s, eating out at a restaurant was saved for special occasions, and delivery of meals to homes was unheard of. Meals were prepared at home using ingredients from supermarkets.

Today, 40% of meals are eaten away from home. But eating meals at restaurants can be up to five times more expensive than making and eating that same meal at home. The reason is you’re paying someone else to prepare your meals in a restaurant.

Therefore, by substituting making and eating meals at home for meals served in a restaurant or delivered to your home is one way to reduce spending. You’re substituting your time for the money you would spend in a restaurant.

Another economic principle is the time value of money. The value of money depends on when it is spent or earned. A dollar today is worth more than a dollar in future years because prices will likely be higher then. Therefore, to move future dollars to now, you’ll need to pay a cost. This is why an interest rate is paid to borrow against your future income.

With interest rates rising and expected to increase even more, borrowing is more expensive. As a result, it makes sense to postpone borrowing when interest rates are high. For example, if you want to buy a house but don’t want to pay today’s mortgage interest rate – which is more than double from a year ago – then put that dream aside until rates come down. And P.S., I think interest rates will be dropping a year from now.

A third applicable economic concept is productivity. In business terms, productivity is output compared to inputs. For example, productivity in an auto factory is the number of vehicles rolling off the assembly line compared to the amount of labor and machinery used to make those vehicles. Higher productivity – meaning more vehicles per worker and machine – usually results in more profits for the company.

Even if you don’t have a home-based business, you want to run your household productively. You want to use your two major resources – time and money – in ways that give the highest results.

A good example is driving. Given the level of gas prices today, cutting back on driving can produce big savings. If you can consolidate driving trips by doing numerous errands on the same trip, then you can drive less and reduce spending at the pump.

These are some economic ideas for coping with a difficult economy. Can you use them to ease some of the economic pain of today’s world? You decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.

11 COMMENTS

  1. This is some of the worst advice I’ve seen….

    FACT: Grocery prices have risen an average of 19% over the past 2 years, while restaurant prices have risen only 6%. Still think you’ll “save” money by shopping and cooking at home?

    FACT: You can use high interest rates to your advantage… move your money into high-yield accounts or savings bonds (Series I = 9.2%).

    • Dinner for two at a local Clayton restaurant = $135.00 plus tip. Two appetizers, two entrees and two drinks.

      Your are so right Tell the truth. Much less expensive than shopping and cooking at home.

      • @NC Gal: You have expensive tastes and money to burn, apparently. The US CPI clearly shows that “food at home” (aka grocery store) costs are nearly double that of “food away from home” (restaurants).

        https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/

        You also forget to factor in your cost of time cooking your meals… unless, that is, you prefer to work for free!

        Instead of the Clayton Steakhouse, try Jones Cafe instead.

        #BeSmart #DontBeSheep

        • Tell, the link you gave does not support your comments. Meal planning proves its cheaper to eat at home. But I agree, you have to have cooking experience to make it work. Some people, maybe you’re one of them, just don’t process cooking and planning skills. Those people always say it’s cheaper to eat out.

          • @Betty: Nope, it is only cheaper I’d you forget to factor in the value of your time. How much are you worth? $30 an hour? I know how much I am with. If you spend an hour shopping and 30 minutes cooking, that’s an extra $45 cost to your “cook at home” meal. This is what people don’t understand — time is with money. I can have a meal delivered for $30… And I’ve saved more than an hour of time (worth $30).

        • @Tell your time is not worth $30 an hour to shop or cook. Just like a Dem you overvalue yourself and never admit you have been proven wrong. Cooking for your family doesn’t entitle you to be paid. By the way that link you provided (cherry picked) proves you wrong. Enough said. Moving on.

  2. Here’s what you can do to improve things long term.

    The problems described have been caused almost entirely by government spending money they don’t have, and interfering with commerce. Stop voting for these things.

  3. Change the kinds of food you eat and prepare meals at home.
    Take sandwiches to work for lunch.
    Stop paying for cable, direct, or pay per view television.
    Stop excess driving. Stay at home more.
    Stop having to always go out.
    Use the vehicle you have. Don’t trade every two years.
    Don’t spend excess money on birthdays, Christmas, or other holidays.
    Don’t play the lottery.
    No credit cards.
    Enjoy the simple things.

  4. Gut the ATF for starters, and then do the CDC, EPA, CIA, NSA, and DoE. Bureaucratic lawmaking should be illegal, and is clearly unconstitutional. No new laws/rules without Congressional authority. If we need to cut, cut federally.

    Term limits
    Fiscal restraints
    Clearly defined size and scope
    https://www.conventionofstates.com NOW!

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