Suze Orman Money Matters

I know there's plenty of talk that oil and other energy commodities are caught in a speculative bubble. The implication of that line of thinking is that if we all just hold our breath (and wallets) a little bit longer the bubble will burst, prices will fall, and we'll no longer face $4.50 a gallon gas (yes, it's already that high in California), home heating bills that rise 20 percent or more a year, and grocery bills that require getting a second job.

Don't Hold Your Breath

I wish that were the case, but I just don't see it happening. It's interesting to me that a lot of the oil chatter is about the oil bubble bursting and the price of crude dropping all the way to $100 a barrel, or maybe even $80. Even if we do get "down" to those levels, it's still a long, long way from where we were less than two years ago.

The optimist will say that if oil falls from its current $134 a barrel (as I write this) to $100, that's a dramatic 25 percent decline. You can't argue with that math, but the realist will point out that even at $100 a barrel, oil will still be double its most recent low: $50.48 a barrel in mid-January 2007.

Checking the Math

And I'm not even sure we'll get any noticeable relief going forward; a lack of long-term energy policy for our country, coupled with rising worldwide commodity demand, just doesn't lend itself to a situation in which the United States will be able to buy energy on the cheap anytime soon. The Energy Information Administration (EIA), the official data keeper of U.S. energy prices, expects regular-grade gasoline to average $3.78 this year, up from $2.81 in 2007. And the EIA forecast is for an average $3.92 per gallon in 2009. Heating oil is forecast to cost an average of $3.95 this year, and $4.25 in 2009. The cost of natural gas is expected to rise 15 percent in 2009.

As you already know all too well, the spike in energy prices ripples throughout the economy and your personal budget. I have little patience for the official inflation figures that show consumer prices have risen just 4.2 percent over the past 12 months. As many have pointed out, the math used for calculating the official consumer price index (CPI) number excludes certain items such as food and energy.

Please -- as if Americans have the luxury of bypassing food and energy in their daily lives. Far from 4.2 percent, plenty of your everyday expenses have risen double or triple that amount in the past year.

Re-energize Your Finances

Life in a time of persistent inflation requires tinkering with your approach to personal finances. When you're contemplating a major purchase, it's no longer sufficient planning to calculate whether you can afford it today. You need to figure out if you'll be able to afford it in the future given higher operating costs. And inflation is also a big factor in both your job stability and the value of your retirement investments.

Here are some rules to help you adjust to the new realities of high energy costs:

• Your home: When the already expensive cost of heating your home in the winter and keeping it cool in summer could keep getting higher and higher, McMansion mania just doesn't make sense. Why would you want to heat and cool a 4,000-plus-square-foot house when any family of four can live more than comfortably in a house half that size? A smaller home means smaller utility bills. Keep that in mind when you're ready to make a move.

I'd also caution anyone with an adjustable rate mortgage to anticipate that they could face a higher rate in the near future. With inflation sticking around as a problem for Ben Bernanke and the Federal Reserve, there's a growing likelihood that sometime in the near future the Fed will have to begin to raise its Fed Funds rate to try and rein in inflation pressures. When that happens, ARM rates will rise, too. The best way to deal with that prospect is to lock in a fixed rate mortgage; the current 6 percent national average is a really good deal.

• Your car: Even if you can cope with $4 and more for a gallon of gas today, don't foolishly think that's the worst case scenario. How about $5 or higher? You won't find anyone suggesting that's out of the question.

So ask yourself: What happens to your family budget if gas rises another 25 percent? Not a pretty picture to contemplate. I realize it's hard to unload a gas guzzler these days, and it makes no sense if you're currently upside down on a car loan. If your work commute is a mileage hog, it's time to get serious about finding some coworkers to carpool with -- or better yet, use public transportation if it's available.

Not only will you save on gas costs, you might also be able to lower your auto insurance premium. If your annual mileage drops below a certain threshold (typically 10,000 miles or so), you could be eligible for a 10 percent or so premium reduction. Check with your insurer.

• Your job: Rising energy costs aren't just a personal consumer issue; businesses face the same budgetary crunch, too. One study estimates that every time the price of oil rises 10 percent, about 150,000 Americans lose their jobs in the subsequent year.

You have two routes for coping. Commit to bulking up your emergency savings account; given the weakened economy, six months of living expenses is the bare bones minimum, and an eight-month stash is the ideal goal. You also need to make sure your job skills stay cutting-edge; the employee with the better skills is often spared in early rounds of layoffs -- or, if the worst should happen, makes you a far better candidate for your next job.

• Your investments: A $250,000 retirement account might look really good today, but if inflation averages 4.5 percent a year, the purchasing power of that $250,000 will be just $161,000 in 10 years. Over 20 years, inflation erodes the value to about $104,000.

Accounting for inflation has always been a key component of retirement planning, but its importance becomes even more acute when the expectation is for higher rates of inflation. For those of you with 10 or more years until you retire, making stocks the core of your retirement investments is one of the best ways to get a shot at solid inflation-beating gains.

Loading up on supposedly low-risk bonds because you have market jitters is actually the riskiest move you can make right now. There's no chance that the 4 percent or so interest on a bond is going to generate inflation-beating gains. To retire comfortably tomorrow requires living with the volatility of stocks in your portfolio today.