Should We Worry About Inflation?
Today, the Washington Post reported that, “prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume.” Usually I would be happy with a 9.2% raise, but apparently, Americans need this just to keep pace with purchasing everyday essentials. Obviously, this drastic rise in inflation - especially for must have items - will not continue, but it’s important to take precautions now, to help us currently fight the increases and prevent us from feeling the pinch down the road.
Should you Ignore Inflation?
Inflation is inevitable, although there are steps the Federal Reserve and others can take to try to tame inflation, it will and must occur. The recent interest rate cuts by the Federal Reserve are intended to aide our economy from sinking further, do to the current credit crisis. However, by making credit more readily available, inflation is always a legitimate concern. So, should we even worry about a problem we cannot control? Worry may be the wrong word, but we feel it is necessary to keep inflation in mind when you are doing your financial planning and budgeting, but it is not everything.
Adjust Your Budget to Accurately Reflect Inflation Concerns
For the most part, inflation increases are reasonably low and do affect on our bank accounts, however, unless you compare your receipts from the previous year, the change would probably slide under your radar. Because money can leak away from you with these small increases, it’s important to track your spending habits with an active budget. In addition, increase the amount you budget for everyday items like food, gas, and health care. If you are not adjusting your budget to accurately reflect changes in prices and spending amounts, it will be hard to ever spend within your budget, thus proper savings will never occur.
Inflation Concerns with Retirement Planning
I’m sure you have often heard the argument against having money placed in low yielding CD’s or money market accounts, because after inflation is adjusted into your earnings, the actual amount pocketed turns into a poor investment. While this is true, I think it is important to look at the bigger picture. Inflation will technically eat into returns on any investment; the most important thing is that we are actually investing. The biggest battle for many is just getting started; inflation should be the least of your worries when it comes to starting a retirement account. At first, we should worry only about variables we can actually control, like seeking out low expense ratios and commissions.
As for lower yielding savings vehicles, I feel it is again important to ignore short-term inflation concerns. We need emergency funds in liquid accounts like these, and smaller interest rates come with the territory of short-term financial security.
Some times, more important than inflation concerns and annual yielding amounts are that we are taking the necessary steps of putting money away in order to properly plan for our futures. For the most part, let the Fed worry about inflation after all, that’s what we pay them for. $
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