Inflation is a strange conundrum for most young investors.
I mean, we hear the word a lot. We probably see it at the grocery store. But in terms of how it really impacts us, our lives, and our financial plan, inflation is a mystery.
Yes, inflation is at a 40-year high, according to data from the Department of Labor. But what does that really mean?
Industry pundits are saying that pressure on consumer prices is unlikely to relent anytime soon. Is inflation anything more than an inconvenience? Here’s a few things that you need to know.
- Reassess your budget. The beginning of the year is always a good time to look at your fixed expenses. This includes your heating bill, groceries, rent, car payment, etc. When you last looked at your budget, your weekly grocery bill, for example, might have been 15% lower than it is now. If expenses increase because of inflation, your savings rate needs to decrease.
- Was that raise really a raise? Near the end of the year, your boss probably called you into his office, shook your hand or gave you a pandemic friendly fist bump, and gave you a 3% raise. You probably celebrated and maybe even called your parents to share the news. But if inflation is at 7%, did you really get a raise or a pay cut? Take a close look at what you are bringing in when you build your new budget.
- Examine your investment accounts. Since we are still considered “young” investors we have time on our side and have probably continued to invest aggressively despite recent market corrections. Inflation is going to hamper the most conservative accounts the most. This includes your savings account. Our conservative portfolio hedges against inflation with investments in commodities or real estate. Other inflation-friendly investments include global equities that keep up with inflation better. Remember: Downside volatility can have upside later.
- Look for tax efficiencies. If you invest in equity markets and create capital gains, you could be facing some tax losses. It is a good time to consult with a tax professional to look for ways to offset these losses.
- Check in on your emergency fund. It is important that you don’t have too much socked away here. An emergency fund should have a maximum of six to nine month of expenses. You should have a different account for saving for that wedding ring or your first house. “Under the mattress money,” which is your emergency fund, needs to be finite. Remember that savings waterfall we talked about.
Inflation and saving is difficult. Remember, I am always here to help and I’d love to help walk you through it all.