How inflation changes saving rules
If prices keep rising, you may need to rethink how to take care of your money and where to put it.
(Money Magazine) -- 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 CNN/Money poll. While we're nowhere near the 1970s - yet - it's a good time to review how inflation changes the rules.
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.
When inflation is high, tangible goods - gold, oil, gems, art, wheat, even canned tuna - 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.
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.
Issue #1 - America's Money: All this week at noon ET, CNN explains how the weakening economy affects you. Full coverage.
Under the government's economic stimulus plan, 130 million people will receive tax rebate checks for $300 and up, starting this week. What do you plan to do with your check? How do you think the stimulus plan will affect the economy? Send us your photos and videos, or email us and tell us what you think.
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