By John G. Merna, Esq.
How Inflation Will Affect You And Your Debt
News of inflation is everywhere. The cost of gas, milk, bacon, just about everything is going up. It will affect everyone, and inflationary cycles are not cycles that end quickly.
How To Play Inflation.
The first thing to understand is that ultimately what inflation does is make the value of a dollar today worth less in the future. We have all experienced this if we are old enough or if we have parents the remember “the good ole’ days”. What you paid for a can of Coke in the 1980’s might have been $0.25. Today a can of Coke may be $1.00 if you’re lucky or as much as $2.00 at a vending machine at an airport or rest stop.
Prices go up. It is inevitable. However, the large price increases resulting from inflationary pressures, which are projected to be 6% or more for the next few years, hit the wallet hard.
First, thing to know is that there exists the idea that the consumer gain from inflation when considering payment of their existing debt. The idea being that if you are paying past debt with future dollars that are worth less the debt cost you less. Well, theoretically that is true. However, factoring the inflationary effect on household essentials such as food, gas, etc., the reality is you have less surplus to pay debt off. The more likely outcome for a family living paycheck-to-paycheck is that they begin or continue to default on their debt exposing them to lawsuits, garnishments, and liens.
One big move in an inflationary cycle that pays positive rewards for years is to dump your debt early in the cycle. There are several reasons this is a smart move, especially if you were already struggling financially.
- As any good sailor would say, “You need to batten the hatches when the storm is coming.” In this case, the “storm” is the inflationary havoc on prices. The “hatches” are securing or protecting your basic needs, food, shelter, etc., by protecting your financial resources. Anything that is draining your financial resources jeopardizes your basics and should be eliminated in a bankruptcy. As the saying goes, “sometimes you have to take a step back to move forward.”
- Stepping completely away from your existing debt at the beginning of an inflationary period not only reduces the pain of surviving these cycles but also prepares you to financially flourish once the cycle has ended. Eliminating your debt in a bankruptcy puts you in a position to recover to the point of buying a house within two to three years. If you are already struggling, eliminating your debt sooner than later puts you in the position to survive the inflationary cycle and, in fact, be in a great financial position once it has passed.
- As I said, inflationary cycles do not resolve quickly. The national news is focusing on two years, but this is because no one can predict how quickly inflation will drop. If you eliminate all unnecessary debt and avoid taking out debt during the inflationary cycle you will be in the best position to purchase a home within that 2–3-year timeline. Because inflation also influences lenders in the form of increasing interest rates, avoiding new debt while these inflationary pressures are still should be a priority.
Without getting into the economics of inflation and how accepted logic is that is cause by an over-abundance of money in the system, the reality is that you must “do more with less” to survive an inflationary cycle. For many this simply may mean, more chicken less steak. For others it may mean choosing between paying a monthly credit card payment or paying for a prescription.
If this pandemic has shown us anything it is that there are more important things in life than money and holding on to the past does not make a better future.
Think about your inflation strategy today and “batten your hatches”. The staff and attorneys of Merna Law are here to help you today. We offer free consultations, affordable rates, and payment plans. Call us today to schedule a free consultation. 800-662-8813.
Keywords: inflation & bankruptcy, wealth building, bad credit
Locations: Richmond, Virginia Beach, Newport News