Inflation seems like a scary concept, but it doesn’t have to be
It’s Financial Wellness Month, and if your new year’s resolution was to get your personal finances in order, we’re here to help. In this series, we’re tackling the most common topics our Certified Financial Planner™ professionals get from Origin members. Today, we’re exploring inflation. You can catch up on our series by reading our previous posts about investments and student loan debt.Inflation. It's an intimidating and, frankly, a confusing term you probably hear a lot about these days. But this doesn't have to be a scary topic, and you certainly don't have to fall prey to the impact of inflation on the economy. In this post, we're going to explain what inflation is and share recommendations from Origin's Lead Financial Planner, Heather Comella, to help you manage your finances wisely during this time.
Inflation is the general increase in the price of goods and services over a period of time. This, in turn, leads to a decrease in purchasing power since your dollar doesn’t go as far when things are more expensive.OK, simple enough. But then why is there so much fuss around inflation? Isn’t inflation a normal part of a growing economy? The answer to that is yes! A bit of inflation is actually desirable, which is why the Federal Reserve has a long-term inflation goal of around 2%. But problems emerge when inflation rates rise significantly above that.For context: In October 2021, prices for U.S. consumers increased by 6.2% from the previous year—the largest 12-month increase since 1990 and well above the Federal Reserve's target. As a result of this sudden inflation, we're seeing the following outcomes:
The pandemic created a perfect storm of problems that ultimately increased the cost of living for most individuals. As a result of historically low-interest rates, government stimulus, and limited consumer spending when COVID-19 first hit, demand for goods and services has skyrocketed recently. Now supply can’t keep up with demand, causing shortages and pricing spikes across many industries—such as automotive and housing.
One of the upsides of inflation is that it typically drives up wages. Unfortunately, there are times like today when inflation rates outpace the increases in compensation. The Labor Department reported in October 2021 that average hourly earnings increased 0.4%. However, top-line inflation for the month also increased 0.9%—meaning that earnings decreased 0.5% for the month.
Your finances will be affected during inflation. As the markets change, so will the value of your investments. Inflation can also reduce the value of the money in your savings account due to increasing prices.
It can be confusing to know what to do with your money with these ongoing changes. Here are 3 recommendations from Comella on managing your finances during an inflationary period.
Having an emergency fund is just as important now as it was in the past. The golden rule is to have 3 to 6 months of living expenses saved up—regardless of your net worth or income.Having this financial cushion on the side ensures you have a stable reserve to dip into in case of an emergency, whether that’s an unexpected job loss or a medical situation. The benefit of a savings account is that its value isn’t subject to swings in the market the way that investments are.However, that doesn’t mean you should put all your money into a savings account. Overfunding a savings account ultimately won’t keep up with inflation. “Anything you don’t need, invest in longer-term growth,” recommends Comella.
During an inflationary period, it’s common to see people scramble to invest in precious metals or commodities because they appear more “stable.”The truth, according to Comella?“The reality is that stocks are a better hedge against inflation.”Rather than trying to move your money into the grain markets, invest your funds in a diversified portfolio.Another tip from Comella is to consider a dollar-cost averaging approach to your investments. Rather than trying to time your investments and going all-in when markets are high, invest smaller amounts over regular intervals. Sometimes you’ll buy when the market is high, and sometimes you’ll buy when the market is low. But it all ends up averaging out.“Time is the best tool in the toolkit,” says Comella.
Witnessing volatility in markets can be scary. Unfortunately, these swings tend to elicit an emotional response from people who end up making unsound financial decisions that hurt them in the long run.Most people don’t have the training to share financial guidance, and some individuals may gain personally from swaying your investment decisions. That’s why Comella cautions against taking financial advice from strangers. Instead, Comella encourages people to take a disciplined approach to investing and work with a financial professional who can guide you through this process.While things may feel overwhelming right now, it may help to remember that the U.S. has dealt with similar periods in the past—and the federal government has the tools to combat inflation. Right now, the best thing you can do is manage your money wisely and find a financial professional to help you.If you, like many individuals, don’t have access to financial support, tell your employer about Origin. We provide employees with direct access to Certified Financial Planners for personalized guidance.