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Financial Planning Challenges Spring 2022– Inflation

May 10, 2022
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Financial Planning Changes Spring 2022– Inflation

Part 1 of 3

 

Heading into mid-May 2022, the market has given back all the gains earned in 2021 and little a more. A string of new challenges and uncertainties are challenging the market. There are three major factors to take note of:    

  • CPI/Inflation is currently around 8.5% vs.1.7% pre-pandemic.[i]
  • Interest rates are on the rise and the federal reserve has slowed bond purchases in preparation to reduce their balance sheet.[ii]
  • Market volatility is up over 30% over last year.[iii]

So, you may be asking yourself, what does this all mean?

How does it impact our financial decisions and financial plans?  Let’s go through each item so we can set better expectations and get prepared for changes, challenges, and opportunities that will affect our financial plans.

The first one we will cover is inflation.  We haven’t had inflation this high in 40 years.  When we have inflation can expect that our dollar today will by fewer goods and services tomorrow.  Inflation reduces the purchasing power of our dollars. 

A few items that are driving inflation.     

  • Continued supply chain issues from COVID-19. Economic slowdown in China as they continue to execute their zero COVID strategy.  Closing major cities and reducing their economic activity. 
  • The war in Ukraine, economic sanctions, and trade disruptions because of the war have reduced supply for several commodities, adding to inflation. Resulting in higher prices for fertilizer, natural gas, oil, and wheat to name a few.  These are major disruption that will take time for the market to address and overcome. 

Inflationary policies utilized to support the economy during COVID. Such as:

  • The federal government ran a deficit of over $5.2 trillion, the largest peace time deficit post World War II. [iv]
  • Student loan payments are still suspended, saving borrow around $5 billion dollars per month.[v] Giving those with student loans extra money to save and spend each month. 
  • The Federal Reserve bought trillions of dollars of debt to keep interest rates low. Ensuring liquidity in markets and saving companies money.   

Why is higher inflation a problem / challenge? Isn’t some inflation good? 

 Steady low inflation is a stated goal of the Federal Reserve’s monetary policy.  They have long targeted 2% annual inflation.  However, if the cost of goods and services rises faster than wages, we have a reduction in wealth and a reduction in real spending.    

 High inflation (above 6%) for producers and consumers can have an impact on real economic growth (economic growth – inflation), consumer confidence and consumer behavior.  There is a fear high inflation will hurt consumers, reduce spending and slow economic growth.  This could lead to reduced corporate earnings and potentially a recession. 

 What’s the other side say? Is there a challenge to this fear? Yes, there is a counter argument.

  • The labor market is hot. Employment numbers are way up, with unemployment below 4% and the expectation of full employment in the economy in the next 6 months.
  • Wages are up. With some of the largest gains going to the lowest earners.[vi] 
  • Consumers have more cash than they did pre pandemic and they are not spending it. There is still over $2 trillion dollars in bank accounts consumers haven’t dipped into yet.[vii] 

What can we do to fight inflation?

Depending on your income, goals, and situation there are a few strategies to discuss and review at our next meeting.

  • Review your cash position. Chances are you are not going to earn more than 1% in a checking or savings account. With inflation at 8.5%, that means your cash is losing 8.5% to inflation.  Your 1$ in 2023 will only be able to buy 91.5 cents worth of goods vs. today.  Review and update your cash strategy. There are several ways we can show you how to earn 3.5% - 9.62% per year in interest.  Using unique asset classes and specialized government securities you may not have ever heard of before. 

Note, most people do not have a cash strategy.  The value of a cash strategy could result in annual savings / benefit equal to 1% - 5% or more of yourannual income.Reduced dependence on unsecured debt and better understanding of short term and long-term obligations.       

  • Update inflation assumptions for long term retirement goals. If inflation is higher than we expected, we need to update our inflation assumptions.  Higher inflation means we may need to save more money to meet our investment goals, such as retirement.  If we don’t increase our rate of savings, we will have to generate higher returns.  If we fail or forget to update the cost of inflation, our strategy could fail to meet our goals / expectations. 
  • Continue to invest regularly. Investing in a diversified portfolio over long periods of time has provided a means to generate returns to help your money keep up with inflation with the potential to beat inflation.  The stock market (or public markets) provide access to several asset classes that have a means to keep up with inflation.  At our next meeting let’s look at our investment policy statement, expected rate of return and asset allocation.     
  • Review and revisit your financial goals. What are you looking to accomplish in the next 5 years financially? What do you want to accomplish in 10 – 15?  Reviewing, defining, revising, and updating goals is an important exercise.  If inflation persists or your financial plan faces additional challenges, you might have to modify your financial behavior, planned spending, savings rate or lifestyle. When you have priorities, it will be easier to identify a what changes to make first to protect progress toward your goals. 

 

 Having concerns about inflation, investment returns or your financial plan? Click here to schedule a meeting to review and update your plan today.  

 

 

Note, investing comes with risks and there is no guarantee of a return or a return that will keep up or beat inflation.

[i]https://fred.stlouisfed.org/graph/?g=8dGq

 

[ii]https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm

[iii]See VIX Index May 10th, 2021 to May 10th, 2022 https://www.google.com/finance/quote/VIX:INDEXCBOE?sa=X&ved=2ahUKEwiX7rLjjNX3AhUKgnIEHTH1CuIQ3ecFegQIDxAY

[iv]https://www.covidmoneytracker.org/

 

[v]https://www.ed.gov/news/press-releases/biden-harris-administration-extends-student-loan-pause-through-may-1-2022

 

[vi]https://www.atlantafed.org/chcs/wage-growth-tracker

 

[vii]https://www.npr.org/2021/12/28/1068587866/americans-saved-a-lot-of-money-this-year-dispite-record-inflation