New rules for the age of high energy prices

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-squarefoot 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 to 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 fixedrate mortgage.

• 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 co-workers 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 inflationbeating 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 Treasury bond is going to generate inflation-beating gains. To retire comfortably tomorrow requires living with the volatility of stocks in your portfolio today.

- Suze Orman is a best-selling author and Emmy award-winning TV host whose new book, "Women and Money," was published in March 2007. For details, please visit www.suzeorman.com.