Five Ways to Outlast Deflation

Deflation is a word on the lips of more financial experts these days.

The term refers to a fall in prices (despite no change in product quality or quantity) and is the opposite of inflation. But like inflation, deflation can have a devastating impact on individual pocketbooks and the broader economy.

On the surface, deflation sounds great. Most consumers cheer when gas prices fall or housing becomes more affordable.

But deflation can be too much of a good thing.

“It would be a wonderful deal, except as prices fall on various things, pretty soon the price that is demanded is not enough to pay workers who build the television sets or whatever it may be. Then they get laid off,” says Tony Cherin, professor emeritus of finance at San Diego State University.

Such job losses make consumers nervous and less likely to spend, deepening the downward trend.

Most financial experts say the odds of the U.S. entering a serious deflationary spiral are low but not outside the realm of possibility.

“I think we’re flirting with it, and I think there are risks that we have to be careful of,” says Stacy Francis, president of Francis Financial Inc., a fee-only financial planning firm in New York.

There are several steps that consumers can take now to prepare themselves to survive a deflationary cycle. In fact, a little preparation may help you to actually benefit from downward price pressure.

Following are five tips to help you survive — and even profit from — deflation.

  1. Get rid of old and new debt

    In a deflationary economy, dollars are worth more going forward. That’s because falling prices allow each dollar to buy more in the future.

    People worried about deflation want to avoid debt because deflation would make paying off a loan even more expensive.

  2. Build emergency savings

    Most financial experts recommend consumers have a rainy day fund of three to six months of living expenses in cash tucked away for emergencies, such as a sudden job loss.

    With unemployment rising, some advisers are raising that target to six to nine months.

  3. Take control of finances

    Getting a firm grip on your financial situation can help ease fears that rear up when headlines turn unrelentingly bleak.

    Most financial experts advise consumers to draw up a budget if they don’t already have one. This reveals where spending is going and helps consumers make adjustments.

  4. Become indispensible at work

    Deflation can take a toll on jobs. Should your employer need to make cutbacks, you’ll want to be last in line.

    Try to make yourself indispensable at work. Don’t show up late. Be on top of things.

  5. Look for opportunities

    Consumers who have secure jobs, emergency funds set aside and sound financial plans may find that a deflationary economy is a great place to scoop up bargains.

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