Friday, May 16, 2008, 1:11PM ET - U.S. Markets close in 2 hours and 49 minutes.
How Inflation Changes 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 CNN/Money poll. While we're nowhere near the 1970s - yet - it's a good time to review how inflation changes the rules.
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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, 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.
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.
Rates
See today's average rates across the country.
-
Loan Type Today Last Week 30 Year Fixed 5.80% 5.74% 15 Year Fixed 5.41% 5.33% 1 Year ARM 5.92% 5.92% 30 Year Fixed Jumbo 7.05% 6.95% 5/1 ARM 5.22% 5.19% 3/1 ARM 5.19% 5.14% Source: Bankrate -
Loan Type Today Last Week $30K Home Equity Loan 7.43% 7.41% $50K Home Equity Loan 7.27% 7.26% $75K Home Equity Loan 7.51% 7.50% $30K HELOC 5.01% 5.03% $50K HELOC 4.17% 4.17% $75K HELOC 4.16% 4.16% Source: Bankrate -
Loan Type Today Last Week 36 Month New Car Loan 6.80% 6.67% 48 Month New Car Loan 6.92% 6.57% 60 Month New Car Loan 6.91% 6.57% 72 Month New Car Loan 7.19% 7.10% 36 Month Used Car Loan 7.16% 7.16% 48 Month Used Car Loan 7.05% 6.89% Source: Bankrate -
Card Type Today Last Week Balance Transfer 10.31% 10.03% Low Interest 11.01% 10.97% For Bad Credit 13.02% 13.12% Cash Back 11.47% 11.46% Business 11.10% 10.91% Airline 12.75% 12.69% Source: CreditCards.com
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