The recent rise in inflation has been one of the most talked-about economic stories over this past year. The Consumer Price Index (CPI) data released by Federal Reserve reports an 8% increase since March 2021, putting it at its highest level since 1980. This means nearly everything you regularly purchase is more expensive than it was a year ago.
When inflation reaches elevated levels, the value of money decreases and you may find yourself unable to purchase basic necessities. Additionally, rising prices can slow down economic growth even further leading to an unstable stock market situation for investors.
Here are some of the most common effects of inflation on your money and asset values:
Real Estate – Higher inflation causes three key changes in the real estate market: Higher property prices, higher interest rates, and higher rental prices.
Bonds – Higher inflation poses a threat to consumers holding fixed-rate bonds as rising prices reduce the purchasing power of money.
Stocks – Higher inflation usually results in lower returns on your money, mainly due to the following two factors: Higher cost of borrowing and uncertainty amongst investors.
Commodities and Collectibles – Investors prefer to put their money into commodities for inflation protection because the value of this asset class remains stable or increases when the financial markets crash.
Debt – Depending on your debt type, inflation can cost you. With fixed-rate debt, you shouldn’t be affected by high inflation. With variable interest rate debt, the interest rate increases with a rising inflation rate. So, it’s best to avoid this type of loan in the current atmosphere.
Luckily, with the right investment advice, you can protect the value of your money and potentially earn a better return on investment even in an inflationary environment.
Here are eight essential tips to help you prepare for inflation:
- Build A Diversified Investment Portfolio –
Building a diversified investment portfolio is one of the best wealth management strategies for protecting your money if the financial markets crash. Ensure you include a mix of growth stocks, bonds, real estate, mutual funds, commodities, and collectibles in your portfolio. Choose investments with varying levels of risk and rates of return to help you cope with the rising inflation rate. Evaluate your personal finance goals at least two times a year and make necessary changes to keep up with rising prices.
- Keep Saving for the Future –
While paying for the things you need today has become more difficult, it’s still important to save for the future. Most financial experts agree you should have three to six months of living expenses set aside in an emergency savings fund to cover unforeseen circumstances such as a job loss, health issue, or home repair. If you don’t currently have an emergency savings fund, start building one now. Even if you can only afford to set aside a small amount each month, your savings will really add up over time.
- Switch Your Existing Debt to A Fixed Rate –
If you have an existing loan with a variable interest rate, try switching it to a fixed rate. During rising inflation, the bank raises interest rates. So, if you have a variable interest rate debt, your interest payments will increase. Additionally, in a high inflation environment, you should consider refinancing credit card debt with a lower fixed-rate loan to reduce the money you pay in total interest. You should also consider products that will most likely be scarce in supply or will be sold at higher prices due to rising inflation.
- Consider Inflation Proof Government Securities –
Avoid Investing in Long-Term Fixed Income Securities. Long-term fixed-income securities offer a fixed interest rate until maturity, but the purchasing power of the total interest earned diminishes with high inflation. The Federal Reserve releases bonds such as the ‘Treasury Inflation Protected Securities’ to protect your money against inflation. These bonds are pegged to the Consumer Price Index, offering higher returns as inflation rises. As an alternative, consider a Series I bond, a federally backed instrument whose interest rate varies with inflation.
- Get To Know Your Spending –
Spending in an inflationary environment can be hazardous to your financial plans, especially if you don’t know how much more you’re spending now than you used to. It is extremely important to track your spending with clients. if you know your normal spending you can tell when prices are increasing and adjust accordingly.
- Eliminate Unnecessary Expenses –
Amid inflation, it’s best to review your personal finance goals and find ways to spend less and save more. Review your weekly and monthly expenses to see what can be cut out. Divorce yourself from autopilot payments, subscriptions, unused memberships and the like. You may also want to consider “convenience” spending – simple services you would normally pay for can be done yourself until prices start to decline. Cutting out even the smallest expense can really add up over time.
- Pay Debt Down –
As interest rates rise so do rates on revolving credit. This is among the main reasons it’s an awful idea to attempt to weather high inflation by putting recurring expenses on a credit card to worry about later. For those carrying balances, your interest rates are creeping from high to astronomical. Paying debt down, or off, is always a good idea, but never more than now. Ways to achieve the goal include debt-consolidation personal loans, zero-interest balance-transfer cards, cash-out refinance loans and consultations with a nonprofit credit counseling agency. Eliminating your monthly debt obligations from past purchases will leave you with more money to pay for the things you need and want today.
- Be Prepared for Inflation to Last –
Higher prices and inflation may be around for a while longer, likely another year or so. This is primarily due to the Federal Reserve’s plans to raise rates a few more times through the remainder of this year. Keep breathing and do your best to budget accordingly. Things will settle down eventually, though we may just have to get used to higher prices.
Based on the above, you can now form more accurate inflation expectations and prepare better during this ongoing inflation crisis.
If you have questions about your budget or other ways to battle inflation, a funding specialist at ViewRidge Funding would be happy to answer them. Give us a call today!