(TheStreet) - How concerned are you about inflation? More than one in four Americans say it’s their number one worry about the economy. You see it in the grocery store and at the gas pump. Headlines trumpet the latest numbers.
Americans' worries aren’t baseless. Inflation is often called a “silent killer” because it quietly raises prices all around us. But should you really worry about it?
Read on to learn more about inflation from professional financial advisor Mark Colgan.
What is Inflation?
Inflation measures how fast the prices of goods and services increase. As inflation rises, prices do, too, because it takes more dollars to buy the same things. Deflation is the opposite – it brings lower prices and more buying power.
What do you think inflation will do over the next year? What about the next ten years?
When you see the word “inflation,” do you feel uneasy? Or scroll to the next thing?
Inflation exists, but most of us don’t spend much time thinking about it (beyond noticing higher prices). Here’s a good example to put into context how much prices could increase over the next decade and the impact that could have on your financial goals.
How Far Can $28,000 Go Today?
You can buy…
- A high-end motorcycle or a decent used car
- Two terrific seats at the Super Bowl
- A luxury one-night stay in the penthouse suite at The Beverly Wilshire.
You cannot buy…
- The average car – that's going to run you close to $41,000
- One year’s tuition at a private university.
In 1971, $28,000 would have bought you an average home, free and clear. Fast forward 50 years to today, and you’ll need 15 times that amount – about $434,200 – to buy an average house in the U.S. Skip ahead to 2030, and the price tag gets even bigger. Looking at these price hikes over the years paints a clear picture of what inflation can do to prices over time. But it doesn’t tell the whole story.
Consumer prices continue to increase more than expected. In 2022, headline consumer prices rose as much as 9.1 percent yearly. That’s the highest level of year-over-year consumer inflation in 41 years! Translated in another way, for a household with $100,000 of income, it feels like they just got a $9,000 pay cut, leaving $750 a month less in income. For some, that is a mortgage payment!
Steps to Protect Yourself from Inflation
1) Build up an emergency fund: Make sure you have three to six months' worth of living expenses saved in case economic conditions worsen or unexpected and/or higher bills come your way.
2) Pay down debt: Interest rates tend to rise during times of high inflation, so it's important to try and reduce any outstanding debts you may have before the situation gets worse. Focus first on debts that carry a variable interest rate, such as credit card debt and home equity loans.
3) Diversify your investments: Diversifying your investments is key to protecting yourself against inflation. Talk with your financial advisor about the possibility of adding quality dividend paying stocks, consumer staple stocks, inflation-indexed bonds and Treasury Inflation-Protected Securities (TIPS).
4) Revisit your income strategy: During times of inflation, it’s important to focus on increasing your income as much as possible. Here are a few strategies that can help you do just that:
- Get another job to squirrel away extra money.
- Negotiate a raise at work: Talk to your supervisor about the possibility of getting a raise, either by getting a promotion or by receiving an increase in salary.
- If you have a second home, consider renting it out when you are not there.
The Silver Lining to Inflation
Inflation affects far more than upfront prices. It shakes up the costs of doing business and borrowing money – and can affect savings, bonds, and plans for the future. We often don’t notice these changes year to year. That’s because inflation normally comes in small doses.
Still, like many things in life and finance, inflation isn’t all bad. When steady and predictable, a moderate amount can be good as it can signal a healthy, growing economy. Inflation causes problems when it increases suddenly and rapidly or when folks haven’t planned for future price increases.
At just the right levels, though, inflation can be good. It can encourage spending, borrowing, and lending to drive real economic growth.
So, What’s the Right Level?
The Federal Reserve hasn’t set a formal inflation target, but lawmakers and many economists tend to peg it at or just under two percent. Inflation is also sensitive to our expectations and our financial choices. If a short spell of high inflation changes our long-term expectations about it, we can drive inflation up even more.
As a financial professional, I’ve seen how inflation can rattle expectations, choices, and portfolios. I’ve had the privilege of helping many people figure out better strategies for dealing with inflation and its fluctuations, so they can keep their financial plans on track to achieve their goals. Make sure you are talking to your financial adviser now about steps to protect your money and assets from inflation.
By Mark Colgan
February 6, 2023
About the author: Mark Colgan
Mark Colgan, CFP®, is a founding partner of Montage Wealth Management. Over the last 29 years he has helped hundreds of clients navigate through significant life events that require big money decisions. He is also the author of Death’s Red Tape, your Guide for Navigating Legal, Financial, and Personal Transitions When a Partner Dies, a newly released technical guide on the logistics people have to contend with after they lose a loved one. For more information visit www.montagewealthmanagement.com.
