Personal Financial Tip 10

We’ve been very lucky over the last few years. Inflation has been very low for some time. Our luck is running out and that means we need to adjust our spending habits to reflect the new reality.

A low inflation rate has made us complacent. Price increases for our day-to-day purchases have been nominal. Any real increase in our spending week to week was mainly due to buying more “stuff” or buying higher priced “stuff”. We could slow or prevent any increasing in our spending with little pain. All we needed to do was to buy less “stuff.”

We are now living in a different world. We are forced to spend more money every week for the same “stuff.” In order to keep our spending in line with our incomes we are forced to buy less. This adjustment is going to prove to be even more painful when you consider the fact that even with a low rate of inflation we were spending more that we earned. The availability of easy and cheap credit made up the difference.

Cheap credit is quickly disappearing. Access to new credit is almost non-existent and existing credit limits are being reduced across the board. Everyone is going to need to make serious adjustments to their spending habits in order to avoid financial ruin.

Inflation has been low for such a long time most of us either don’t remember how we dealt with double-digit inflation or aren’t old enough to have faced it in the past. We’ve developed an instant gratification mentality. We want to live for today, enjoy ourselves now, buy the newest toys now and pay for it later. That’s way the debt load of the average American is at a historic high.

Budgeting hasn’t been one of our strong points but it’s a skill we are going to need to master and master quickly. The price of everything we buy is getting more expensive. Inflation becomes a justification for instant gratification. It subtly encourages us to overspend today. Putting off a purchase not only means that we lose the enjoyment of the product today is also means that it is going to cost more when we do buy. The bad habit of living for today now seems to have a logical foundation. Why wait, it’s only going to cost more tomorrow so I’m actually saving money by buying it today. This attitude is only going to make matters worse.

We are already seeing the effects of inflation on the decisions investors are making. In a low inflationary marketplace investors will focus their investments on paper investments. That is, stocks and bonds. When investors expect a period of higher inflation. They tend to move their investments into hard assets such as commodities.

Look at what’s happen in the stock market for the first half of this year. Every major stock exchange throughout the world has seen a drop in overall value ranging from 15 to 50%. Now look at the commodity market. The cost of all raw materials from oil to food has seen record run up in values. Investor money is moving from paper to hard assets.

Yes, global demand for raw materials has been steadily rising over the years. This is influencing the increasing prices of commodities. This underlying cause for increasing commodity prices has set the foundation for the spiking price increases caused by investors.

Profits are down for most companies. This means they are selling fewer goods. If they are selling fewer goods they need to produce less. In producing less, they will need fewer raw materials. A softening in demand for raw materials should stabilize or even lower the price of these resources. We are not seeing that, prices are continuing to increase. This is the result of investors moving their money into this asset class.

The only sensible assumption we can make is that inflation will increase and stay higher for the foreseeable future. By making adjustments to our spending habits in line with this assumption what’s the worse that can happen? Inflation stays low; we are spending less money with the result that we either end up with less debt or more saving. There’s no downside here.

We could continue on the path we’re on because we’ve assumed that inflation will be kept in check. However, we have a downside with drastic consequences if we’re wrong. We end up deeper in debt, assuming we don’t lose access to credit, or in bankruptcy. We just can’t afford to be wrong. It is too dangerous to make this assumption.

Most of us don’t need to make drastic changes. Getting rid of your SUV and buying a hybrid isn’t necessary. Fuel costs can be reduced without major lifestyle changes. Just by eliminating wasted trips your fuel bill can be reduced. Then when it’s time to replace your vehicle, downsize. This could be a perfect time to quit smoking. There’s a substantial cost saving here in addition to the health benefits. Tie in eating out less with that diet you keep promising to go on. Stop buying you kids every new gadget that comes out. In addition to the money saved your kids will be less spoiled and will grow into stronger adults.

Reducing spending is difficult to do. However, if you make a lifestyle change that improves your life, like becoming more environmentally sensitive or eating healthier, that also reduces spending the process becomes easier.

If we don’t change the way we handle our money today we will be risking financial insolvency tomorrow. Be proactive.