Inflation and Your Finances

Inflation seems to be the topic on everyone’s minds right now. But what is it exactly, and how does it impact your finances?

By staying informed on what causes inflation and routinely adapting your financial strategy to meet the current market, you will be equipped to handle the ever-changing financial landscape.

What is inflation?

Inflation is the rate at which the price for goods and services rises, which is caused by a number of factors.

As the amount of money in an economy rises, the demand for goods and services can also be expected to rise. With an increase in demand, sellers can charge higher prices. If supply cannot keep up with this new level of demand, prices will increase even higher.

It can also be caused by an increase in the cost of production or commodities. For example, if the costs of the parts and labor needed to build a car increases, the price of the overall car will increase as well.

As the price of goods and services increases, workers generally request higher wages to keep up with the level of inflation. The higher cost of labor will in turn lead to higher prices, again causing a cyclical relationship that only adds to inflation.

Given these factors, inflation is something that is expected on a regular basis. The Federal Reserve generally aims for an inflation rate of 2% per year.

Inflation and purchasing power 

If the price of goods and services increases, this means the value of your dollar will decrease, as it will not have the purchasing power it did before. If your income stays the same while prices increase, this will cause you to use a larger percentage of your income for your expenses, like groceries, gas, clothing, etc.

Some long-term purchases can help curb inflation. For example, if you have a fixed-rate 30-year mortgage, you will theoretically make the same payment towards the principal and interest every month for 30 years. Your final payment in 30 years will be lower in relative value once you account for the inflation over the duration of the mortgage, as long as your income increases to keep up with inflation.

How does inflation impact my savings?

The impact of inflation on your savings depends on the current dividend rate on your savings. For example, if the dividend rate for your savings account is less than the current inflation rate, then your savings are not growing at the same rate as inflation, and will lose value over time.

If you are in this situation and retired, then your standard of living can go down year-over-year as inflation continues to grow. This can also be bad news if you are saving up for a large purchase, like a college education or a down payment on a house, as your money will have less purchasing power over time.

What should I do?

Luckily, there are a number of things you can do to potentially mitigate the effects of inflation on your financial situation.

1. Review your budget

With expenses on the rise, it may be a good time to review your budget to see exactly where your money is going. Look for areas where you are spending more on average than before. Find expenses that can be cut out entirely, or at least reduced by making changes to your daily habits. Make more meals at home, purchase generic-brand goods, compare the price of your current phone bill to competitors, etc. These adjustments may seem small by themselves, but they can add up over time.

2. Bolster your emergency funds

As the cost of essential goods increases, it is important to increase how much you are saving for emergencies. We recommend setting aside enough to cover essential expenses for three to six months.

3. Invest in a diversified portfolio

By having a diversified portfolio of stocks, bonds, and other investments, the hope is that some of these investments will be able to keep up with or exceed inflation. It is important to note that investments that have the ability to exceed the rate of inflation often come with higher risks. Consider how much risk you can take on given where you are at in your investment journey.

4. Meet with Vantage West Wealth Management

The professionals at Vantage West Wealth Management are skilled at helping you plan for the future while keeping your best interests first and foremost.

Working together, we’ll create a road map for pursuing your financial goals in four steps.

1. Gather information
   We’ll listen carefully to your goals and concerns.
2. Analyze and Recommend
   We’ll study your case, research, and evaluate alternatives, and share recommendations with you.

• Implement
  We’ll provide you with information on products and services to help you pursue your goals.

1. Monitor and Review
   It’s important to be prepared. We’ll be an active, committed partner in making sure your plan continues to help you pursue your financial goals over time.

With planning and the help of the right professionals, inflation can go from being scary and unknown, to understandable and manageable.

Learn more about Vantage West Wealth Management and sign up for a consultation.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.