For Fuel Cost Spikes, There's Nothing Like a Plan

By Kathie Dickenson

When fuel prices go up, so does the price of almost everything else. It costs more to transport merchandise to stores, more to heat homes and public spaces, even more to deliver the mail. In short, rising energy prices bring on general inflation, says Radford University finance professor Clarence Rose. The individual impact varies widely depending on factors such as the distance of your daily commute, what kind of car you drive, how you heat your home and, high on the list, how well you have planned for financial stress.




For many individuals and families, rising energy prices as a result of the Gulf Coast hurricanes were the economic crisis of the year for 2005, says Rose, but it could be something else next year. The potential for financial crisis, whether created at the national or personal level, is always present. With the inflation rate hovering at around five percent and the possibility of energy costs skyrocketing, says Rose, people must err on the side of caution in their financial decision making. That doesn’t mean hiding money in a mattress. It means building a solid financial foundation and an intelligent investment portfolio. Rose explains the basic steps.

Build a solid financial foundation.

Live within your means — an old saying that still holds wisdom. Create a budget based on your income and stick with it. Avoid high-interest debt such as credit card purchases and don’t be tempted by expensive, potentially disastrous bailouts, such as cash-till-payday loans.

Create an emergency fund. Set aside money to be easily accessible in case of a personal crisis, such as a job loss, an illness or an unexpected major expense. During your working years, aim at enough money to sustain you for at least four to six months. If you’re retired, plan on enough for at least six months to a year. “Every individual and family experiences financial emergencies over time,” says Rose. “Not being prepared magnifies the problems.” He says money set aside for an emergency fund should be placed in short-term investments such as certificates of deposit, money market accounts or U.S. Savings bonds so that they earn more interest than a basic savings account but can be liquidated quickly.

Carry appropriate insurance coverage. Protect yourself and your family with insurance for health care expenses and for replacement of your income in case of disability or death. Insure your home, automobile and other assets, and purchase liability protection.

Invest for the Future

You’re in charge of your finances. At one time, says Rose, people could count on their employer to plan and provide for their retirement. Not so now, he says. What happened to the retirees and employees of Enron is a sad example of dependence on employers, he says, and “nobody wants to be 65 and totally dependent on Social Security. Individuals must take responsibility for their own finances.” Young workers should start saving and investing as soon as possible and older workers who haven’t started should start now.

Take advantage of tax-sheltered and tax-deferred investment opportunities. Tax-sheltered opportunities include 401(k) plans, 403 (b) plans, profit sharing plans, traditional IRAs and Section 529 education saving plans. The Roth IRA is a tax-deferred opportunity. Rose says employees should take advantage of these opportunities to the fullest extent possible, but any amount invested is better than nothing and will be valuable when needed.

Build an aggressive, intelligent stock portfolio. For most people, the best way to invest to create wealth is through mutual funds rather than buying individual stocks, says Rose, and the best performing mutual funds are usually indexed to the stock market. Choose a fund carefully, he says. Of approximately 17,500 mutual funds, 80 percent perform lower than the stock market’s average performance, but indexed funds are designed to closely match the market. Indexed funds charge an average fee of approximately 0.3 percent, whereas the average mutual fund charges 1.42 percent. “A one percent difference in your average annual return makes a big difference in the value of your investments over time,” says Rose.

Stay in it for the long term. Wise investment in the stock market is not about quick turn-arounds or get-rich-quick tips. It is about regular investing and holding on to investments for the long term. “The stock market will bounce up and down in the short run, but create the greatest wealth in the long run,” says Rose. Holding on to stocks for a minimum of 10-15 years should give you a good return on your investment despite slow periods.

Invest with confidence. Since 1926, says Rose, the average rate of return on stocks has been 10.4 percent. “You must include stocks in your investment portfolio when trying to create wealth,” he says. “It’s the best game in town.”

Buying a home is still a good investment. Rose reminds us that even as interest rates rise, being a homeowner offers numerous financial advantages. Year-of-purchase tax deductions, qualified residence interest deductions, property tax deductions, home equity interest deductions, the availability of funds through home equity lines, and home resale value are among the many reasons home buying remains a good investment idea.