Earlier this year, my colleague Dayana Yochim wrote about "Finance's Forbidden Word." Can you guess what the word is? It contains six letters, but you'd think it held four by the way many people recoil from it.


See? I'll bet you felt a little shiver go down your spine when you read it. Dayana said the word is so cringe-inducing that "Tom Gardner warned me not to use it in my headline if I wanted to attract any readers besides my mother. And even then, hers would be just a mercy click."

Fortunately, this article is about gas prices, with just a nod to budgeting. But then, I suppose that thinking about gas prices is probably no more appealing than thinking about budgeting. Still, permit me to soldier on, for I have some important points to offer, thanks to Fool reader John Reiss.

It's the change that matters
After I wrote about the relative cost of gas, John wrote this to me in an email:

"I think the issue no one seems to focus on . is the [gas] price change [italics by Selena] that everyone must learn to absorb. You are right -- we are pretty much stuck with our vehicles. They are not an elastic commodity (to most people). Most people consider [a vehicle] purchase second only to your home in size. So, when you are used to spending $X for gasoline, or electricity, or water, and now you have to spend [two or three times as much], it is the increase that causes you pain, especially if you have little buffer in your budget to absorb the [change]. . Where I used to account for $200 in my monthly budget for gasoline, I now have to enter $400+. Where my heating bill used to be $150 a month last year, I should expect $225 a month for the same usage this year."

These are good points. Last year, the average gas user nationwide spent about $700 for heat over the winter months, although prices in the Midwest -- where people rely heavily on natural gas for home heating -- averaged about $950 for the season. These folks can expect to pay, respectively, some $1,000 or $1,400 -- or more -- this winter. That's a big increase; it will cost many households more than $500 extra.

If you drive about 12,000 miles per year and you get around 20 miles per gallon, you're consuming 600 gallons of gas per year. If last year you paid an average of $1.60 per gallon and this year you pay an average of $2.60, you'll be forking over an extra $600 this year. If your household sports two cars and two drivers, you can double that number.

Already, for many households, the rising cost of gas is threatening to consume $1,000 (or significantly more) above former levels. Have you factored such an expectation into your financial plans? Can you absorb this hit? What trade-offs will you make?

Discretionary and non-discretionary
There are lots of ways to classify expenses: big vs. small (new car, candy bar), pleasant vs. unpleasant (concert tickets, taxes), infrequent vs. frequent (cemetery plot, coffee). Here's another way: discretionary vs. non-discretionary. A discretionary expense is one you typically don't need to incur, such as when you buy a book or an 11th pair of sneakers. A non-discretionary expense leaves you little choice, such as when you buy your blood-pressure medication or pay your water bill.

Paying attention to the extent to which various expenses are discretionary can pay off in your personal financial life, as well as in your investing life.

If you're evaluating a company as a possible investment, you might give a contender extra points if it offers things you'll purchase repeatedly, since such products can provide long revenue streams for the company. Think of Starbucks (NASDAQ:SBUX), Allied Domecq's Dunkin' Donuts, KrispyKreme (NYSE:KKD), and even Anheuser-Busch (NYSE:BUD). Many customers buy drinks and snacks from these companies every day, with not too much persuasion required for each sale. In contrast, General Motors (NYSE:GM) has to work harder to make each sale, and customers will typically buy a car only once every few years.

But when the economic environment gets tougher, how discretionary a purchase is becomes more important. This is where companies with less discretionary offerings have an edge. If you have asthma, you may need regular doses of Merck's (NYSE:MRK) Singulair, and you're not going to cut back just because the price of gas has skyrocketed. Instead, you might consider cutting back on your Mocha Frappuccino consumption. What many people do before that, though, is delay planned major expenses, like getting a new car or a new washing machine. Meanwhile, they keep treating themselves to those coffees and beers, each of which seems like a small expense at the time. They may put off buying a new home and instead may opt to make their current home spiffier by spending greenbacks at Home Depot (NYSE:HD).

Thinking about trade-offs
But back to you, your life, and the ridiculous price of gas. If you're looking at an additional gas-related cost of $1,000 to $1,500 this year, where is the extra money going to come from? Here are some possibilities:

  • If you have a comfortable cushion, you might simply plan to spend what you have to on gas and end up with less money to invest. This isn't the best option, though, if you short-change your vital long-term investments. That $1,000 that you don't invest today won't be able to grow into nearly $7,000 in 20 years at 10%. Grab a free trial of our Rule Your Retirement newsletter, and we'll not only advise you on how to set yourself up for a comfy retirement, but we'll also inspire you to take action.

  • If you plan to spend what you have to spend on gas and continue making all of your desired purchases through the magic of plastic, think again. The rising price of gas threatens to sink many more Americans into credit-card-debt quicksand. Please inform yourself about the ways of the credit card industry before you consider this option. And if you're already saddled with debt, let us help you dig out.

  • If you're a sensible sort, you should make a list of all the expenses you routinely have: rent or mortgage, heating, phone, gas, clothing, food, entertainment, investments, gifts, laundry, car repairs, etc. First, make sure that your income can cover those expenses. Then sort them according to how discretionary they are. Consider less-expensive alternatives for as many as possible. Can you, for example, carpool to work twice a week? Might you have friends over to play board games instead of going out to an expensive restaurant? Before you cut back on something very important -- such as your retirement savings -- just to pay for gas, see whether you can find some other trade-off to make.

You can find many great money-saving tips on our vibrant Living Below Your Means discussion board, which to date contains more than 650,000 posts. Here's a long directory of tips it offers.

What are your favorite ways to save money? Share them with your fellow readers on our boards -- or just drop in to see what others have suggested.

Home Depot and Anheuser-Busch are Motley Fool Inside Value recommendations. Merck is a Motley Fool Income Investor pick. Krispy Kreme is a Motley Fool Stock Advisor selection.

Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, and Card & Board Games. She owns shares of Home Depot. Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.