Investment Center
Articles: Five ways to fight deflation fears
Which way will the economic winds blow in 2011 and beyond? Although no one knows for sure, the Wall Street Journal recently reported a growing concern among economists over potential deflation. This contrasts with other opinions voiced during the past few years that have focused on fears of inflation.
In simple terms, deflation is a decline in the value of assets and consumer prices. It may result from a drop in demand during a recessionary period. However, there are several ways you might protect yourself from the trend. Here are five practical suggestions:
1. Bring down debt. In a deflationary economy, dollars are worth more in the future, due to falling prices. Therefore, paying off loans becomes more expensive. For example, in a deflationary economy, an automobile costing $25,000 today might be priced at $22,000 the following year, but your loan amounts remain the same. As a result, you might try to lessen your burden through astute consolidation of credit card debt or other means.
2. Save for a “rainy day.” It often is suggested that you should maintain savings to cover three to six months’ worth of living expenses in case of emergencies, such as a sudden job loss or an unexpected medical condition. With higher unemployment rates, you might extend that target out six to nine months’ worth of expenses. If deflation occurs, you will be in a better position to benefit.
3. Take control of your financial situation. Getting a grip on personal finances can help ease fears arising in turbulent economic times. If you don’t already have one, draw up a budget. Try saving for specific financial goals by arranging automated transfers from your main bank account to another account. Earmark the savings for specific goals like a college fund for your children, a retirement nest egg, or a welldeserved vacation.
4. Make yourself “indispensable” at work. Deflation usually takes its toll on the job market. If your employer needs to make cuts, you will want to be the last in line. Don’t just do the bare minimum required of you: Go the extra yard. Also, remain poised for other opportunities. Should your job be eliminated, you will want to explore your options quickly. Take advantage of networking and social media contacts.
5. Prepare to cash in on bargains. A deflationary economy may create unique buying opportunities. For instance, some first-time homebuyers are already finding homes selling at much lower prices than sellers were asking a year ago. Similarly, if you want to build up an investment portfolio, you might benefit by acquiring stocks of solid companies at low prices. Of course, there are no absolute guarantees, and investors must be aware of all the inherent risks.
These are sound fundamental strategies to follow whether deflation occurs or not. Coordinate your efforts with the help of a trusted financial advisor.
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