How to protect your financial future from the effects of inflation
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When the December CPI revealed that inflation had risen by 7% in 2021, the percentage was just quantifying what everyone already knew: prices had risen a lot.
“I once heard someone say that inflation is a tax on everyone, which is true,” said Erik Wright, owner of New Horizon Home Buyers. “It ultimately affects everyone.”
Part of the reason almost everyone is feeling the pinch of inflation is because almost everyone has benefited from the trillions of dollars of stimulus that flooded the economy in 2021.
“Usually an expansionary monetary policy with government stimulus programs would bolster economic growth and inflation,” said Dr. Tenpao Lee, professor emeritus of economics at Niagara University.
The massive stimulus measures did not lead to major inflation after the Great Recession, Lee explained, because the global economy grew so rapidly that supply was able to keep up with all the new demand induced by the stimulus measures. relaunch.
This time around, supply chains broke and prices rose.
But those supply chains are recovering, the stimulus well is running dry, interest rates are rising and inflation is expected to come down – but when? And how can people defend what’s left of their ever-diminishing dollars after those dollars lost 7% of their purchasing power in 2021?
See: Understanding the differences between inflation, deflation and stagflation
Find: Social Security COLA: Seniors will get biggest increase in decades, but it’s no match for a 6.2% inflation surge
Prices will continue to rise in 2022, but more slowly, at least
There won’t be stimulus money to fan the flames of inflation with new demand in 2022, but policymakers aren’t counting on that alone to win the fight. The Fed is expected to raise interest rates four times in 2022 — maybe even more — while shrinking its balance sheets by $100 billion a month to reduce the flow of money into the economy. But it’s a big slow ship, and inflation isn’t expected to normalize until the fourth quarter.
“For 2022, we expect above-average inflation, but at lower growth rates than seen in 2021,” said Taylor Sutherland, senior wealth management adviser at Halbert Hargrove. Sutherland takes this seriously, but reminds readers to put 7% inflation – and the more modest, but still high rate that is expected to define 2022 – in historical context.
“To many, 4% inflation might sound scary, but it’s really just the average of the last 40+ years,” Sutherland said. “It’s like we’ve driven 45 on the highway in the last 10 years and just stepped on the gas. We may have been over the speed limit for the past two quarters, but we’ve eased off the throttle a bit and expect to be back at the speed limit for the coming year. From a relative speed basis, however, even driving the speed limit will seem fast.
See: While wages have technically increased in 2021, inflation has resulted in a 2.4% pay cut for workers
Inflation protection of your financial life is not feasible for most
Inflation and the forces that drive it are complex economic concepts that escape the comprehension of most laymen. This fact becomes clear when you get advice from people who really understand the subject.
“To hedge against inflation from an investment perspective, reduce the importance of long-term fixed-income assets and businesses funded by short-term liabilities,” Sutherland said. “Buy – or lend to – companies that have pricing power and can pass higher input costs onto consumers.”
That’s great advice, indeed, but keep in mind that Sutherland is a CFP, CIMA, AIF, and professional wealth advisor with a senior position. If you don’t know how to reduce the importance of long-term fixed income assets or assess which companies have enough pricing power to pass higher input costs onto consumers, join the club.
Virtually every expert surveyed by GOBankingRates said that if you have wealth to protect, now is the time to consider seeking professional financial help, even if you’ve never done so before.
Find: 5 times inflation is actually good for your finances
Rethink Saving and Simplify Investing Until Inflation Comes Down
If you can’t afford to hire a pro or are willing to take a chance on your own, base your strategy on one undeniable fact: money in the average savings account loses value at a rate of 7% while paying interest at the rate of 0.06%. At least temporarily, it’s hard to argue that cash in savings accounts wouldn’t be much better protected from the inflation of savings bonds — but not just any.
“Another good way to invest money is to invest in Series I Treasuries, which currently yield 7.12% and are considered safe investments,” Wright said.
I-bonds are not liquid, so they are not a safe haven for cash in your emergency fund. You have to hold them for at least a year and the return is only guaranteed for six months – after that it adjusts to inflation. Still, the 7.12% yields cancel out last year’s inflation with room to maneuver – and Treasuries are as close to a guaranteed investment as you can get.
If you want to keep your money in play and think the recent market downturn has been a blow, an investment as simple as a basic ETF could save your money from the inflation black hole of an account. ‘saving.
“To protect yourself from inflation, you can invest in an index fund that tracks the S&P 500,” said Andrew Lokenauth, a personal finance expert and chief financial officer who has held senior positions at Goldman Sachs and AIG. “Money in a bank account loses value every day due to inflation.”
But according to Sean Burke of Stuart Estate Planning, the best and easiest way to hedge your life against inflation might just be to turn money into things now if you know money will buy fewer things in a few months.
“You can buy non-perishables in bulk today so you don’t pay more for the same stuff later,” he said.
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