personal Finance Story

Welcome to the new recession. High inflation coupled with a weak housing market are throwing the media into a frenzy of doom saying. Either issue alone would not be that difficult an issue to tackle. However, when combined as they are today, it makes for an especially difficult financial times.

High Inflation Reducing Income

Inflation is here to roost. Every time I fill up my car I feel it. I’ve had to make an adjustment to my monthly budget to account for the sharp increase in prices. I just wasn’t making it on the estimate that I made at the beginning of the year.  Granted the increase is only $40 a month, the approximate cost of a tank of gas for my Corolla.  One of the benefits to having your finances in order is being able to shrug off periods of high inflation.

We are feeling the same pressure at the grocery store where specific foods have jumped in price. This isn’t as bad as the gas bump. We can always adjust for higher grocery prices by slightly changing our food preferences. However, I feel that a family already close to the edge may already be waiting for the sales and using coupons as a matter of course. The recent increases are just going to make matters worse.

The Housing Bubble Bursts

You’ve read the headlines. You know the story. Houses are in foreclosure left and right. Desperate home owners have their houses languish on the market while buyers sit on the sidelines waiting for the prices to drop even further.  Hell, I’m one of them.  I’m cheerleading the market to crash deeper.  As a potential first time home buyer, times are good.

This was long overdue. There was no way prices could continue to climb the way they did during the boom.  Thank goodness, because otherwise, home ownership would become an ever elusive luxury for new members of the middle class. It is high time that prices took a dive.

The One Two Punch

Matters only get worse when the Federal Reserve cuts into interest rates to keep the credit markets functioning. This act feeds into the inflation troubles. We are facing negative real rates on our savings because of the current Fed policy in work.

That isn’t the troubling part of the equation. As I see it, the weak housing market is actually reducing home ownership in this country. A house, if used properly, i.e. not as an ATM using home equity loans and the like, can be the largest and most effective hedge to inflation for a family.

If your expenses in gas and food go up in a given year, it would ultimately be ok if the cost of owning your house stayed the same. Your overall inflation rate will be small because the biggest expense in your budget is fixed.  This is exactly what happens when you have a traditional 30 or 15 year fixed home mortgage.  You can always get ahead because even today’s high inflation would not overrun the fixed cost of owning your home.

As a percentage of your expenses, a house in going to be at the top of the list. The fact that this cost will never increase is the layman’s protection from inflation. This protection was eroded significantly in the bubble due to the presence of ARMs, home equity loans and other lines of credit. Ever bigger houses became the norm as credit practices became shadier and shadier.  Years of poor lending standards have finally reaped what they have sown.

The Solution is Simple, Make More Money

Today is the day to do whatever is required to get a better job and make more money. If you have an extra 3 to 4 hundred dollars every month then chances are you still cringe when you fill up your tank but it doesn’t materially hurt you. You are still going to make all you payments and keep food on the table.

The horrible irony is that the ones who are least able to handle the economic difficulty are always hit the hardest. It is just the way the math comes out no matter what kind of recession we are in.

Advance your education and be ready to jump at an opportunity. If you are in any way struggling as a result of the current market you can’t afford not to be prepared. I wish I had a more concrete answer but when you crunch the numbers, the result is always the same. Cash is king. So get your own crown if you can help it. You can’t afford not to.

Inflation has many forms including many that are self inflicted.

• … upgrading to premium cable
• … buying the latest cell phone each year with a new and more expensive contract
• … signing a luxury car lease every three years
• … purchasing organic groceries on every trip
• … taking that extra long vacation you can’t actually afford

And then there are those you have absolutely no control over.

• … gasoline is approaching $4.00 per gallon
• … grocery prices have increased rapidly

We know what we can control and what we cannot. I don’t look to place blame for rising costs in my life. I seek to control them as best I can.

As a rule, inflation harms the people least able to cope with rising costs the most. A family that has been living paycheck to paycheck will certainly be in more trouble than a family that saves and or invests a healthy amount every month.

It has everything to do with margin. You need a buffer between what is coming in each month and what is going out. During good times, that buffer can be saved and invested for better returns. In bad times, and in times of high inflation, that buffer will shrink. But instead of not being able to pay the bills you will simply have to save less than you would otherwise be able to.

High inflation years are followed by low inflation years, just as the stock market waxes and wans over time. I can’t predict the future, but I believe that high prices will moderate over time. It may take years to cycle. But it may also happen sooner than we think. The well prepared are going to be able to weather the storm.

Everybody feels the pain of high gas prices. I am glad that I got a Toyota Corolla when I graduated from college. I get consistent 32+ miles to the gallon of regular. My monthly gas spending is often just shy of $200. Even if you don’t drive much or use a fuel efficient car, you aren’t immune. High gas prices affect the transportation cost of the businesses and companies that you and I all rely on.

So besides going out and buying a hybrid right this very moment, there is little the average consumer can do. Gas prices are going to continue to increase in the coming weeks. Relief may be very far away. I looked up the national average prices for regular unleaded gas at the Energy Information Administration website. Here is a brief summary of what I found.

There is No Such Thing as a Summer Driving Season

Over the last ten years the peak price varies from the 2nd week of January to the 2nd week of December. That is quite a range. While there is some truth to a general rise in prices during the summer months, the actual peak price seen during any given year is far from predictable.

I was watching the TV the other day and overheard a news piece on rising gas prices and summer driving months. I believe it was the Fox Business Channel, but in any case, the talking head du jour was spouting off about summer gas prices. He stated that peak gas prices often occur in the month of May and that consumers may see relief soon. That’s crap. Maybe that is the case in his particular neck of the woods. Somehow, I don’t think he looks at his receipt from filling up and cringes like the rest of America does.

Relief May Be Coming, But It Might Be Next Year

Prices don’t rise in a straight line. While there are years that see a huge jump, like between 2004 and 2005, there are years where the peak price declines or remains flat.

That is good news for consumers. With the rampant price increases we are seeing now, I would not be surprised if prices took a year off in 2009 or 2010. It’s possible. A year of price stabilization would cool the average pace we are seeing in prices to a more normal rate historically.

Let’s be honest. I am not a professional financial guru who tracks oil prices and I can hardly predict the future. The best defense against rising prices, gas, food, health care or otherwise, is to have a plan. On paper on purpose as Dave Ramsey says so well. Budget your year conservatively and make sure you are living within your means first. Then invest aggressively to ensure that your nest egg with whip inflation in the long haul and not the other way around.

There is a lot of worrying concerning inflation out there. There is very little you can do about it. One thing you can do however, is track it. Forget about the CPI, core inflation and all the other numbers from the Federal Reserve. The only number that really matters is your own personal inflation rate. Your real rate of inflation.

Track Your Spending

The only way you can know for sure how much your spending and expenses are growing is to monitor them. Hopefully you already have a budget. If you don’t, sit down and make one today. Go over your budget at least once every month and see how you did. It only takes an hour a month, thats twelve hours a year. You can fit it in even the busiest of schedules.  For something so important, it is worth it.

After a year of diligent tracking you will be able to see exactly how much more you are spending year over year. This is your real inflation rate and is unique to your own situation.

Assuming my 2008 budget holds, my expenses and spending will grow 3.41% from 2007 to 2008. All of the numbers are not in yet, but I’m hopeful that I can bring that number down by spending less than planned over the course of the year. So far, all three months of the year have been under my budget.

Control Your Consumption

We live in a commercialized world and there are many temptations out there to create our own inflation. Do I really need an iPhone with a pricer wireless plan than I have now? No. Not now.

I’m not saying that I wouldn’t ever buy an iPhone, but right now, keeping my expenses in check is more important. I won’t sabotage my goals in order to have the internet in my pocket (although it would be really cool).