(Barron's) - Even with roaring inflation, there’s a glass half-full approach to the issue that can ease the sting.
So says Howard Hook, a CPA and certified financial planner with wealth management firm EKS Associates in Princeton, N.J. He says consumers should focus on ways to counter inflation’s negative impact, which could include ferreting out higher yielding, liquid investments that still offer a safety net.
“I understand these things hit everybody differently, and inflation is still having a net negative impact on most people’s finances, but there are some bright spots in a difficult situation,” Hook says in an interview.
To be sure, inflation, which has reared its head in recent months, has been straining many people’s pocketbooks in terms of food, home, energy, and other price increases. The latest figures, due out Thursday, when the Consumer Price Index becomes available, should give more context to where things may be heading. Economists are predicting an 8% year-over-year gain, which would put it close to the 8.2% September year-over-year reading, despite the Federal Reserve’s best efforts to cool inflation by raising rates.
Hook points out some moves clients can make to fight back against inflation. Those who have extra cash sitting in low-yielding checking or savings accounts could consider ways to take advantage of higher yields, without incurring significantly higher risk. For the past few years, consumers didn’t have much incentive to move this money, but now there are options to get “a significantly higher yield—safely,” he says.
One option could be six-month Treasuries, which are yielding around 4%. That’s decent given that bank savings accounts have an average annual percentage yield (APY) of 0.16%, according to the most recent data from Bankrate.com.
There’s another advantage to Treasuries for people living in states that impose an income tax; income from Treasuries is exempt from state and local taxes (though not federal tax).
Investors could also consider higher yielding savings accounts, which some banks offer, or money market accounts, some of which are yielding in the 3% range. CDs, too, are starting to offer more desirable returns, though keep in mind that there can be penalties for pulling money out early, Hook says.
There are other ways the government has tried to soften some of the inflationary blow, especially for retirees or retirement savers. Social Security benefits, for example, will be increasing 8.7% next year. Meanwhile, retirement savers under age 50 will be able to set aside $22,500 in 2023 in their 401(k), 403(b), and other tax-advantaged employer savings plans, up from $20,500 in 2022. IRA and Roth IRA contributions are increasing to $6,500 from $6,000. Catch-up contributions have also increased for those over age 50 in many employer-sponsored plans.
There are some beneficial tax-related adjustments as well. The annual gift exclusion is increasing 6.25% to $17,000 from $16,000 and the standard deduction increases to $27,700 for married couples filing jointly for tax year 2023. That’s up $1,800 from 2022. For single taxpayers and married individuals filing separately, the standard deduction is rising $900 to $13,850 for 2023, according to the IRS. While these measures don’t necessarily soften the blow completely, Hook urges clients to look at the inflationary picture “in its entirety” and make adjustments, as appropriate, that can help their financial picture.
By Cheryl Winokur Munk
November 7, 2022
