Financial Tips

Inflation is a mystery for many. Unless you’re an economist, this economic phenomenon is elusive and mysterious. It’s also something that we have no control over. Yet, it wields an undeniable, powerful force over your finances. Because of this, it pays to try to understand what inflation is and its impact on your money.

What is Inflation?

Technically speaking, inflation is defined as the rate at which prices inflate and purchasing power declines. There’s a direct link between the two. When prices of goods and services go up, the value of your dollar goes down. To put it into simple language, if you have $10 and apples cost a dollar each, you can buy ten apples. When the price of apples inflates to $1.50, you can only buy six apples. The price went up, so your purchasing power went down. Think of it like a seesaw.

Inflation and the Economy

With inflation, it’s not just your personal finances that are affected. Sure, you can’t buy as many apples, but the dollar in general has less value in the market, and that holds true for all areas of the market, from the local fruit stand, to U.S. government purchases from foreign governments.

And, when the dollar falls in value, that means that other currencies are stronger than they were in relationship to the dollar. Someone using another currency, like euros, can buy more of an item that’s selling in U.S. dollars, because their currency value has become a little bit higher compared to our dollar.

So inflation in the U.S. impacts not just you and your household apple supply, but the entire world. That’s very overwhelming to think about, especially since there’s nothing you can personally do to control inflation.

Inflation and Your Investments

Inflation doesn’t just lower your purchasing power. It also hits home with your investments. A simple example would be a household with $1,000 in a savings account earning a modest 1% in interest. After a year, your $1,000 in savings will have grown to $1,010. But when inflation is at 2%, you lose 2% of your purchasing power. So even though you now have $1,010, it’s only worth $990. You actually lost value!

It gets worse. Inflation is cumulative. Over a period of ten years, with 2% inflation each year, the costs of goods and services will go up by about 22%, leaving you with that much less purchasing power.

How to Protect Your Finances Against Inflation

Hopefully, now you can see why you can’t just ignore inflation and how it impacts your money. And, while you can’t do anything to “cure” inflation, there are things you can do to mitigate its negative effects on your finances. Before making any major financial decisions, consult with your adviser of choice.

Consider Inflation-indexed Securities

Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds. This means that they give you a fixed rate of return, but the principal value of the bond is adjusted for inflation, so you get some added protection. TIPS are available for purchase online at TreasuryDirect or through brokerage firms.

Avoid Getting Caught up in Purchasing Contracts

There are some home purchase programs where you can rent a property now, and then when you’re ready to buy a year or so later, you can purchase the property at its market value. In exchange for this “first right to purchase,” you pay a slightly higher rent rate than market value. But when the year comes for you to buy, odds are extremely high that the house price will have risen. So all you’re getting out of the deal is the “chance” to pay higher rent than you should have paid for an entire year. No matter what, you’ll have to pay more for the house at a later date. You would have been better off paying lower rent elsewhere and investing your accrued down payment money in something like TIPS bonds or another smart investment vehicle.

Keep Debt Low

With declining purchase power comes a reduced ability to repay debt. High levels of debt will be crippling in high inflation scenarios, especially if the debt interest rate is fixed. Keep your debt exposure to a minimum in order to help ensure your financial security when inflation rises.

Buy Now

If you’re planning on making major purchases that you can readily afford to buy now with cash, it might be smart to buy now before prices go up. Examples include a new roof on the house or a new addition on your home, since construction materials are some of the first to go up when inflation rises. Other examples include large home appliances like furnaces and water heaters. Remember, only consider this strategy if you can afford to pay cash.

Reduce Frivolous Spending

As much as possible, curb spending on non-essentials when inflation is high. You’ll end up paying more for things that won’t hold their value, or waste money that you may need for essentials like shelter, food, clothing or transportation. The government hopes you’ll consume more in order to boost the economy and keep inflation in check, but leave that up to wealthier folks who aren’t having to look for quarters in the couch at the end of the month. The economy will be just fine without you buying a new plasma screen this month.

When inflation is especially bad and you’re having to tighten your purse strings, it’s a good idea to check in with your CPA. Your CPA can help you to identify ways to better manage cash flow, find hidden tax deductions and advise on your financial moves in a difficult economic climate.

by Kate Supino

The key to building a secure financial future is as much about knowledge as it is about having a lot of money. Lots of people with tons of money have squandered it away because they were financially illiterate. Many with very little have lifted themselves out of poverty by learning as much as they could about money and business matters. Whether you’re just starting out or trying to turn bad finances around, here are some of the basics you should know.

Start Saving as Soon as You Start Earning

Every time you get a paycheck, put a certain amount or a certain percentage into a savings account. If you start doing this as soon as you start earning, you’ll have a tidy sum by the time you hit the age of 21. Those who don’t make a habit of saving will find that they have nothing to show for the years of hard work, except maybe a handful of possessions. When you put money aside for later, life’s unpleasant surprises won’t upend your life. You’ll have security. You’ll have money to pay for the expensive car repair, that last minute flight to see an elderly relative one final time, or that out-of-pocket medical bill. You’ll also have cash on hand to take advantage of the opportunities that will come your way in life, which could be the ticket to lifting you into a more lucrative financial situation.

Your Credit Habits Are Being Tracked

Even if you don’t pay attention to your credit history, credit agencies are tracking it. Every time you make a payment on time, it gets noted on your credit file. The same thing happens when you’re late with a payment. It’s not just about your credit score; it’s about your credit history and how you use credit. When it comes time for you to borrow, apply for credit or a mortgage, all that history is going to be used either for you or against you. It’s worth every penny to subscribe to a credit monitoring service, where you can track your own credit on a weekly or even daily basis. Not only does it let you know where you stand, but it can be very motivating as far as trying to create the best credit history possible.

Understand the Differences Among Financial Experts

There are important distinctions among various financial experts. Knowing these differences will help you to get the right help you need from people you can trust to put your interests first.

Actuary

Actuaries primarily work within the context of pension plans, retirement funds, insurance and investments. They often work in the interest of companies, conducting due diligence and research into risk management and setting insurance premium rates.

CPA

CPAs, or Certified Public Accountants, are licensed professionals who offer individuals and businesses support around tax matters, financial planning, auditing, cash management and financial consulting. They may work in a CPA firm or another entity or for themselves. They do not represent any entity other than their clients.

Accountant

Accountants may or may not have formal education, and are a step above bookkeepers. They handle a broad range of general financial tasks, often in a support role for CPAs. They may work for a company or for themselves.

Financial Advisor

Financial advisors provide guidance on various aspects of personal finance and investment management for individuals. They may have interests other than their clients and may receive income, commissions or bonuses for bringing new business to particular investment funds or companies.

It’s Okay to Change Jobs For more Money

In the past, people stayed at the same company for 25 years or more. But what’s often forgotten is that “back then,” that long stint at one company often paid off with a pension well into old age. Today, pensions are very rare unless you work for an educational institution or government agency, so there’s no impetus to stay at the same job for decades at a time. You shouldn’t feel so loyal to a company that you forgo the opportunity to earn more money elsewhere. You don’t get a prize for staying in the same job. So keep trying to increase your salary, even if it means saying goodbye to a job you enjoy. The end result might just be a happier you, with less stress over money. In some cases, you might even be offered a raise at your current job if they feel they don’t want to lose you over money.

Work on Some Form of Passive Income as Soon as Possible

When you’re younger, it’s fine to spend 40 hours a week or more earning your salary. As time goes by, you’ll have less energy and may grow weary of getting yourself to the office everyday. As early on in life as you can, work on getting some kind of passive income. It doesn’t have to be the kind of income that allows you to buy a Bentley with a chauffeur; it can just be supplemental income that takes some of the pressure off later in life. Then, if something happens and you can’t work full-time or you want to supplement your social security in retirement, you’ll have a little something coming in to help pay for groceries or add some discretionary money to your budget.

Get Rich Slow

There are lots of recent examples of people becoming rich almost overnight. Bitcoin made lots of millionaires, but many of them lost their profits just as fast. NFTs are an inexplicable trend where we still have to see how they play out. Social media influencers make it seem like they’re making money hand over fist. But these examples aren’t reliable for a secure financial future. YouTube channels can be demonetized on a whim. Crypto is like playing Jenga. Focus on steady, educated financial moves, and you’ll get ahead no matter what the latest fads are.

For more help on building a secure financial future based on your individual resources and situation, consult with your CPA, who is on your side and no one else’s.

by Kate Supino