Thursday, May 1, 2008

Inflation should change your savings rules

If prices keep rising, you may need to think differently about a few things. Have you seen the price of milk lately? It's up 13% since last year.

The pain isn't only at the supermarket, however. Hospital costs are up 8%; gas, 33%; and prices overall climbed 4% (vs. less than 3% annually over the past decade). Plus, with the Fed pumping money into the economy, the price pinch probably isn't improving soon.

No wonder inflation ranked as the No. 1 financial worry in a recent poll. While we're nowhere near the 1970s - yet - it's a good time to review how inflation changes the rules.

Rule 1: You can lose by saving

A one-year CD now pays 1.97% a year on average. At 4% inflation, you lose 2% a year before taxes. Best strategy: Shop for top savings rates. Keep bond and CD maturities short.

Rule 2: Stuff beats paper assets...on paper

When inflation is high, tangible goods - gold, oil, gems, art, even wheat - tend to have an edge over securities, especially bonds.

Reason: Because of their rarity, beauty or usefulness, these items have an intrinsic worth that doesn't change, even as paper money loses value.

That said, the market's evaluation of their intrinsic worth varies wildly - for many commodities, it's dangerously exuberant right now. Also, the cost of insuring and maintaining things like art eats into any profits.

Rule 3: Fixed-rate debt is your friend

Here's why: You repay a fixed number of ever-cheaper dollars. Not so with variable-rate loans like ARMs, HELOCs and - worst of all - credit cards.

2 comments:

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QUALITY STOCKS UNDER 5 DOLLARS said...

Inflation is the devil in the details.