Posted by Michael

Wikipedia defines:

Inflation is the rise in the general level of prices of goods and services in a given economy over a period of time.

20 years ago, the median price for a home in the United States was $112,500.00. Today, that kind of money might get you a super-car, but not the average home. $251,000.00 is what you would need today to buy an average home, on an average street, in an average neighborhood; no super-car included.

Why is getting into a 2.5 bedroom 1.5 bathroom townhouse so expensive? Inflation. At its simplest, inflation means your money loses its worth over time. Theres an old adage that says ‘a penny saved is a penny earned’… or some crap like that. In reality - a penny saved in 1988 is worth about half a penny today.

Why Does Inflation Exist?

Wikipedia, once again:

Mainstream economists overwhelmingly agree that high rates of inflation are caused by high rates of growth of the money supply.

There was a cartoon I watched a long time ago. It starred Scrooge McDuck and his grand-duckinlings Huey, Dewey and Louie. The only episode I remember was one dealing with the topic of inflation. In this episode; every time a bell rung, the money supply in what ever cartoon city they were living in would double. At first, everyone was happy. I mean hell, I’d be happy if my money supply instantly doubled. Once everyone realized that paying a wheel barrel full of ‘money’ to buy an ice cream was the same as being broke in the first place - the problem was evident.

Our genius of a president is strongly considering printing $600 in ‘money’ for every tax paying citizen in the U.S… and then actually giving it to them. Thats not nearly as bad as the money supply doubling every time a bell rings, but its close.

Combating Inflation

By now, you should know that saving your money isn’t enough. Yes, saving your money is vitally important to your financial well-being, but how you save it is even more important. In the past, I’ve talked about high-yield online bank accounts that can help fight the inflation bug. If you haven’t yet - you should read that article. I want to talk about an effect of inflation that you can use to your advantage in the coming months though: debt destruction.

Rising inflation can provide opportunity to reduce debt effectively. How? The debt won’t change, and in general salaries are increased as a result of an inflation hike. You can take advantage of this by using your better wage to pay off some of that debt. Do you have to be prepared for this in advance? Yes, yes you do. Thats why I’m telling you now. Note though, that if the Fed raises interest rates - inflations debt destruction powers are pretty much dead.

Takeaways:

• If you don’t have one, open a high yield online savings account and put something in it. I like HSBC’s offering, but Washington Mutuals isn’t too shabby
• There may be opportunity in the looming recession/inflation hike. Be prepared. Start putting some money away now to use towards your debt, or better yet - stick it to the man and use your $600 from the gov’ment to pay some of it off.