Inflation is having its affect on American families
At about this time last year, the Federal Reserve was calling inflation “transitory”. It’s proven to be anything but. The inflation rate hit 9.1% in June, a level not seen since 1981 at the tail end of the stagflationary 1970s. It’s proven to be so enduring that it’s time to make some tough choices.
Below are nine strategies to prepare your financial life for inflation. The more you can implement, the more likely it is you’ll come out on top of this suddenly not-so-temporary economic condition.
One of the unkindest cuts from inflation is the assault on your income. But since this wave of inflation is specifically concentrated in salaries, it may be possible to increase your income.
“Ask for a raise, before it’s too late,” recommends Kristin Myers, Editor-in-Chief at The Balance. “One of the best ways to fight inflation is to increase your income, whether that’s through a side hustle or a pay increase at your primary job. Now may be a good time to ask your boss for a raise–unemployment is low, jobs are plentiful, and your employer may be more likely to approve that pay increase. Your window of opportunity may close if we enter a recession and cash-strapped employers stop hiring.”
Outrunning inflation can be especially important if you’re in the critical last few years before retirement. You’ll need to earn at least enough to cover your living expenses and maintain your retirement savings level.
“The economy is in turmoil and if you do not have enough money to retire now it’s important to come up with a plan for yourself on how long you intend to continue working and make decisions from there,” advises Gabe Krajicek, Chief Executive Officer at Kasasa. “Inflation is at a record high making it more difficult to save. But taking small steps can make a big difference. While inflation is a major problem, the upside is – due to the labor shortage – there’s a wide range of job opportunities.”
For current retirees, especially those living on a fixed income, post-retirement employment is one of the best income-enhancing options for many retirees. The large number of job openings from the great resignation is creating plenty of opportunities for retirees to re-enter the workforce, if only on a part-time basis. This has also created plenty of options of working from home and making good money.
It’s often tempting to slow or stop investing to cover current living expenses during inflation. That may improve your short-term situation, but it could be a disaster for the long-term. One of the best ways to improve your overall financial situation is to continue investing even during high inflation.
“Stay invested!” recommends The Motley Fool advisor/analyst, Jason Moser. “Bear markets and recessions are shorter-lived than bull markets and expansion. Selling when things are down only locks in your losses. Investing is a lifelong endeavor.”
That can be difficult advice to follow in the current bear market. But you can turn that around by thinking of the downturn as a buying opportunity.
“Whether it’s your 401k, IRA or your personal brokerage account, putting cash into your long-term investments is a great way to fight inflation,” advises Lauren Anastasio, Director of Financial Advice and CFP at Stash. “Markets are down – a lot – year to date, and while that could bring some stress when you look at your account balance, it really just means that investments are on sale.”
Choosing specific investments can be difficult. The stocks that have worked in the recent past don’t seem to be performing well now. While there may be no truly recession proof stocks, there are some sectors that are known to perform better than others in inflationary environments.
“During times of inflation, utility stocks become a great investment option,” suggests Riggs Eckelberry, Founder and CEO at OriginClear, an idea lab for water innovation projects. “They are relatively low risk and remain steady regardless of the current economy or market cycle, making them desirable for any well-diversified portfolio. When picking dividend-yielding utilities investors should look for royalty income or profit-sharing. It is key to remember that utilities outpace inflation, but dividends do not.”
This can be a difficult decision if you need a home or a car. But at its core, inflation is all about uncertainty. That’s not the best environment to make major purchases in. It can make future survival more difficult if the rising price trend continues for several more years.
Part of the problem with major purchases is that they usually involve debt. If you buy now, you may be locking in a high monthly payment for the foreseeable future. Any new debt you take on now will be a reduction of future income.
“Housing opportunities will largely depend on the market,” warns Chris Motola, Financial Analyst at MerchantMaverick. “Overheated markets in the Sunbelt will probably pop before those in the Northeast and Rust Belt. But the window for excellent rates has closed, so you’ll probably want to wait for lower prices. You don’t want to be stuck with both an overpriced house and high mortgage rates. The same thing applies to cars.”
If borrowing money to make major purchases should be avoided, borrowing to cover budget shortfalls is just plain bad news. You’ll be exchanging a short-term cash need for a longer-term obligation. That will only guarantee more cash shortages in the future.
“If you face a particularly hard time financially and fall into debt, there are a lot of easy mistakes to make,” cautions Julian House, Managing Director at U.K.-based My Favorite Voucher Codes. “Scrambling to borrow as much as possible, perhaps through buy now, pay later schemes, is unsustainable. Balancing two, three, four or more forms of debt at the same time simply isn’t realistic.”
If you are facing a cash shortage, borrowing should be the last option. Drawdown savings, sell personal possessions, or get a second income to avoid new debt.
Interest rates are on the rise, and that means variable interest rate credit arrangements may not be the deals they were a few months ago – if they ever were a deal at all. The strategy now should be to convert credit cards to fixed-rate loans.
“The Federal Reserve is raising short-term interest rates in an effort to slow lending demand and shrink the money supply to staunch inflation,” says Matthew King, Wealth Planner, Emerald Advisory Services at Wilmington Trust. “If you have debt tied to floating interest rates and are concerned about how that could affect your payments, you may want to consider obtaining a fixed rate loan or paying down the loan. Locking in your cost of borrowing could protect you from further increases in interest rates.”
One of the easiest ways to make this happen is by using personal loans. They’re fixed-rate loans, with terms between three- and five-years, and loan amounts from $1,000 to as much as $100,000. If you can’t pay off your variable rate loans quickly, consolidating through a personal loan may be the next best alternative.
Leasing a vehicle can seem like a good way to save money during inflation. But much like debt, it just defers the cash flow problem to a future date. You can avoid that by buying your next car, rather than leasing it.
“One of the best ways to hedge against inflation, is to consider purchasing your next vehicle as opposed to leasing,” recommends Joseph A. Carbone, Jr., CFP®, Founder & Financial Planner at Focus Planning Group, a firm that helps people transition into retirement. “Cars have been one of the main sources of inflation in the past couple of years. But when you own your vehicle, you don’t need to lease a new car that could be potentially 10 to 15 % more expensive than the model you purchased three years ago.”
The reality is that while leasing a car can be cheaper upfront, it’s almost always more expensive over the long term. That’s the reason why auto dealers promote lease arrangements.
“In addition, you won’t need to buy a new vehicle at the end of the term,” continues Carbone, “And pay the crazy market value adjustments we have seen during the pandemic due to supply chain issues.”
Fortunately, the Internet has made discount deals quickly and easily available. With rising prices, now’s the time to take advantage of those services and apps.
“Use popular apps like GasBuddy and Waze to find the cheapest gas in your area,” recommends Matthew Jackson, President, Solid Wealth Advisors, and #1 Best Selling Author of The Retirement Dreammaker – Master the Art Of Retirement Abundance. “Online sites like Raise and Gift Card Granny sell discounted gift cards for grocery stores and gas stations. Also be sure to check your tire pressure for correct inflation. It may help you save up to $0.15 per mile.”
Another strategy, but one that will require time and effort, is to renegotiate bills for insurance, utilities, and subscriptions.
“Recently, I did a review of my monthly bills and was a little shocked but not surprised,” confessed Tom Diem, CFP®, ChFC® at Diem Wealth Management. “I just picked up the phone and started calling some of these providers and requested a discount. My first call to my Cable TV company was quickly rewarded with over $20 a month in discounts. I next called my cell provider and had even better results by getting their most up-to-date plan and a nearly $40 monthly reduction.”
And don’t be afraid to shop for new providers if your existing ones don’t cooperate. “My big win was not to my existing Auto and Home Insurance agent,” Diem reports, “but to my new agent who replaced my policies with ones with better coverage from a more highly rated company and roughly a $200 monthly premium reduction.”
The conventional advice is to have between three- and-six months living expenses in your emergency fund. But recessions and times of inflation make it a solid strategy to have even more.
Matthew D Grishman, Principal, Wealth Adviser at Gebhardt Group Inc. recommends expanding your emergency fund to include one-to-three years of living expenses in cash at all times.
“This is guidance we’ve been giving clients since the 2008 experience,” reports Grisham. “People have often said to me “cash? But my money’s not doing anything in cash”. It sure is doing something for you while sitting in cash – it’s there for you. The money you allocate to cash is exactly for times like these. That part of your portfolio has a very specific job; and it is not to grow or earn interest. It’s simply to sit there and be there for you when you need it.”
A larger emergency fund serves two important purposes:
It’s an admittedly difficult strategy to implement in the face of rising prices. But that’s also the purpose of increasing your income, postponing major purchases, and looking for deals that will lower your cost of living. The extra money saved should be directed into emergency savings.
In today’s do-it-yourself financial environment, many people are relying on apps to make important financial decisions. But inflation represents a time of change and stress. That usually requires gaining new knowledge and skills to better navigate the future. There are plenty of resources available to help guide you.
“If you’re concerned about managing money amid high inflation, I recommend reaching out to a financial advisor,” recommends Maria Perez, Assistant Vice President, Personal Finance Management at Navy Federal Credit Union. “Some financial institutions, including Navy Federal, offer free financial planning to their members or customers.”
To find an advisor in your area, you can use FINRA’s brokercheck or search your location using Finance Strategists’ helpful search tool.
“Think about it like this,” Perez continues. “When you need your car fixed, you take it to a mechanic. When you want to get in shape, you talk to your doctor. For your finances, talk to an expert with your financial institution and see what tailored support or guidance they can provide.”
Most of us have not experienced a time of high inflation. It requires a different way of thinking and behaving, and affects everything from spending habits to investment decisions.
As well, we must consider that inflation may be with us for a long time. We’ll need strategies that will help us not only better manage the obstacles, but even to thrive in the face of it.
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