By Boyce F. Lowery, CLU®, ChFC®
It’s official. After months of being told the current inflation crisis is transitory, Federal Reserve Chair Jerome Powell announced that we can expect high inflation to continue into 2022. (1) What may have seemed like a slight inconvenience at first has now become a much larger issue as people watch the value of their money degrade right before their eyes, with no clear end in sight.
In fact, the most recent CPI report from December 2021 suggested that inflation has risen an astounding 7% over the past year! (2) That is significantly higher than the typical 2% rise we see in an average year.
That’s not to say that the future is bleak, but rather to temper expectations so that we can help our clients properly plan for the future and mitigate potential risk. While rising inflation can be stressful for many, it doesn’t have to completely derail your finances. Here are four steps you can take to reduce inflation’s impact on your plan and preserve your long-term purchasing power.
1. Reassess Your Budget
The first step in beating inflation is to understand its impact on your overall financial plan. The unfortunate fact is that most people have unlimited wants and only limited resources. Inflation exacerbates this issue by making every dollar you earn worth less than it was worth the day before. So, the best way to cope with a high-inflation environment is to reassess your budget and make adjustments where you can.
This is especially important as the Fed continues to update its monetary policy and the changing COVID-19 landscape affects how you live and work on a day-to-day basis. For instance, if you find yourself going back to the office after working from home for the past couple years, your budget may need to be readjusted for things like on-the-go lunches, new work clothes, and increased childcare costs. If you are aware of these upcoming costs, you can plan ahead and make cuts to other areas of spending in order to compensate. Even if you don’t expect your lifestyle to change all that much, taking a look at your budget and reassessing your spending is never a bad idea.
2. Substitute Common Purchases
If you reevaluate your budget and find that there are many places you can’t scale back, consider substituting your most common purchases for brands that are less expensive. For example, switching to store-brand food, clothing, and over-the-counter medicines can help you save on items you can’t go without. You can also compromise on other types of purchases such as vehicles, tools, or household goods. Rather than buying brand-new, shop smarter by purchasing used items or sourcing goods from family, friends, or neighbors. Upcycling items you already have is also another great option.
3. Borrow Sooner Rather Than Later
It may seem counterintuitive to take out a loan during a high-inflation environment, but inflation is actually good for borrowers. Because it causes the value of your money to decline over time, funds borrowed today will be paid back with money that is worth less than it was when it was originally borrowed. This isn’t to say you should start excessively borrowing money for things you don’t need. Rather, if you know you have a large purchase coming up, like buying a home or a vehicle, borrowing sooner rather than later can enable you to get more value out of the money you’re going to spend anyway.
4. Consider TIPS
Another great way to beat inflation is to consider Treasury Inflation Protected Securities (TIPS), which are U.S. government-backed bonds periodically adjusted to account for inflation. Like all U.S. Treasury bonds, they will not earn the largest rate of return, but your purchasing power will remain intact, and the risk of default is low due to backing by the government. An alternative to TIPS is Series I savings bonds, which are also adjusted for inflation and provide the added benefit of tax-advantaged college funding.
Let Us Help You Protect Against Inflation
It’s understandable to be concerned about inflation. Many of us are not only worried about how it will impact our current finances, but also about how it will affect our long-term goals. That’s why it’s so important to understand your options.
At Suncrest Advisors, we have the tools and expertise to guide you through a long-term inflationary environment. We will review your planning and help you make the best decision when it comes to inflation protection. Call us at 888-827-0146 to see how we can help you, today.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.