Suddenly, saving is sexy and budgeting is back in vogue. All it took was gas at $4 per gallon and a 30% increase in the price of eggs, and now even families who were accustomed to spending freely (or using their credit cards) are trying to economize.
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Prices have been rising right along with summer temperatures. At an annualized clip of 3.9%, inflation is running ahead of its long-term average of 3.4%. Kiplingers is looking for prices to rise about 4% over the coming year.
That's still a far cry from 30 years ago, when the rate of inflation hit 11.3% in 1979 and peaked at 13.5% in 1980. But it does mask even higher increases for things you buy every day. For example, the U.S. Department of Agriculture predicts that food prices will rise 5.5% in 2008, with double-digit percentage increases for bread, eggs and milk. And no one who drives will be surprised to learn that the price of gasoline has soared by more than 30% over the past year.
High prices mean high anxiety for many consumers. In survey after survey, Americans say they are trying to spend smarter this year and sock away more money. Rather than spend their economic-stimulus checks, many people say they'll use the money to beef up savings accounts or pay off debt (or they'll earmark the cash for gas and other necessities).
Cutting back can be especially challenging for couples like Ron and Jenn Newman of Lindenhurst, N.Y., who face the additional costs of a new baby. Their daughter, Amanda, was born last October. Or like Marc and Jennifer Martinez of San Ramon, Cal. Marc, a digital-video editor, left his full-time job at a local television station last February to go solo. Or like Kurt Koppensteiner and his wife, Kristina Huddleston, of Louisville, Ky. Kurt was laid off from his banking job in January. Now, says Kristina, a lawyer, "I really watch the prices at the grocery store. I can tell you every time bananas go up 10 cents."
Minding their outlays for food and gas saves Kristina and Kurt more than $160 per month. That's $1,920 in annual savings -- more than this summer's federal tax-rebate check for most families. All three families have come up with creative ways to cut back without feeling deprived -- and they've even found money to put aside for college, retirement and future vacations.
Children can be a real budget buster. For the Newmans, Amanda's birth and day-care costs, coupled with higher prices for food and gas, felt like "a double whammy," says Jenn.
But kids are also a source of tax breaks that let you pocket more money. For example, when Amanda was born, the Newmans became eligible for an additional withholding exemption, putting $3,500 of their income off-limits to Uncle Sam. In the 25% tax bracket, an extra exemption can boost take-home pay by $875 per year. (Use our easy Withholding Calculator to figure out your tax exemptions.
In addition, when it comes time to file their 2008 income taxes next year, the Newmans can claim a child tax credit worth $1,000 available for children under 17. That would reduce their tax bill dollar for dollar.
The Newmans get help with day-care expenses by taking advantage of the dependent-care spending account offered by Ron's employer, Eclipsys, where he works as an IT project manager. They can set aside up to $5,000 a year in pretax dollars to pay for day-care costs.
If you don't have access to a dependent-care account, you can use the dependent-care credit. It allows most working families to take a tax credit of up to $600 for one child, or $1,200 for two or more children, for qualified day-care expenses.
The Martinezes have come up with an even more economical solution for child-care expenses: They stagger their work schedules so they can care for their two children, Matthew, 8, and Mallory, 3. Marc, 48, is able to complete the bulk of his work at night, so he can mind the kids on weekdays while Jennifer works as a marketing representative. Then she takes over as primary parent in the evenings, giving Marc time to work.