Looming price increases can be mitigated

Paula Dougherty, CFP, ChFC, CLU, MBA, is a Certified Financial Planner with American Express Financial Advisors Inc.

The economy may be on a path toward recovery, but price hikes are looming for 2004 in areas such as insurance, heating costs, interest rates, college costs, and state and local taxes. When you add to this dilemma the fact that savings accounts are at all-time low yields, it surely will be tougher to beat inflation in 2004.

Health care: On average, health insurance costs for employers are expected to rise 12 percent in 2004. As a result, businesses are increasingly opting to share the burden with their employees.

According to a recent study by the Kaiser Family Foundation, the average premium that employees now pay for family coverage has jumped nearly 50 percent over the past three years, from $1,619 to $2,412. Expect that trend to continue.

Home and car insurance: As a result of an increase in water damage claims in California, a rise in mold claims in Texas and higher costs for building materials, home insurance premiums are expected to increase 8 percent to an average of $615 a year, according to the Insurance Information Institute.

Ready for some more bad news? It's also expected that car insurance will rise approximately 6 percent, to $898 a year, due in part to the rising cost of vehicle repair and the rise in jury awards in liability cases.

Heating costs: According to the Department of Energy, the price of natural gas is expected to rise considerably as well, translating into an approximate increase of $50 a month in your winter heating bills. Electric heat users also may see higher bills because some electric suppliers use natural gas for generation.

College costs: College costs have been going up an average of about 6 percent a year since 1990. According to the College Board, these costs will continue to climb in 2004 because, among other reasons, state appropriations for public universities are down and compensation costs for faculty are up.

Interest rates: With the yield on the 10-year Treasury (the benchmark to which mortgage rates are most closely tied) at a one-year high and mortgage rates climbing from record lows, the likelihood that interest rates will soon rise is very good.

How to beat it

Although the price hikes will likely take a toll on most consumers' 2004 budgets, you should not feel paralyzed by the impending increases. There are many things you can do to cut back, adjust and prepare for these rising costs. Here are some tips to help you beat inflation and survive the expected increases in 2004.

1. Consider moving money out of cash into higher-yielding assets.

2. Consider increasing your car, health and home insurance deductibles, thereby lowering your premium and offsetting the increase.

3. Consolidate credit cards and lock in lower rates by transferring debt or acquiring a home equity line of credit.

4. Many people carry home equity lines of credit that are variable and tied to the prime rate, which is currently at approximately 4.25 percent. If the prime rate goes up, so does their monthly payment. If interest rates really begin to climb, consider locking in a "fixed" second mortgage.

5. Many organizations, such as Department for Work and Pensions and American Automobile Association, offer energy-saving tips.

6. Get professional help. There is no better time than now to consult a qualified financial advisor to get personalized assistance in beating inflation, as well as to take a comprehensive look at your short- and long-term goals and financial plan.