There is no doubt that you have heard the word inflation tossed around in recent months. That is for a good reason, given all the happenings in the world that have caused an attention-getting rate increase in the cost of living. In June 2022, inflation soared to a four-decade high. The consumer price index rose 9.1% from the previous year, making it the most significant gain since 1981. For many Americans, this is a massive concern as the price of even the most basic essentials becomes unattainable for some. Now, more than ever is the time to protect yourself against inflation.
Inflation also can have a significant effect on general economic growth, which can, in turn, have an impact on employment security and unemployment. Inflation also has a tremendous effect on the cost of borrowing money and directly reflects people’s ability to buy a home. Therefore, the best way to buffer against inflation is to be as prepared as possible.
Here, we’ll discuss several items in your financial plan that you can review to better weather the inflation storm.
Cash Flow
Now is an excellent time to review your typical living expenses and decide what may need to be changed. For example, your essential monthly expenditures may reflect some of this inflationary action, influencing your decision to remove them or cut back if possible.
Also, simply changing your shopping habits can help combat inflation and ease cash flow issues. Get organized by making a list of trouble areas and setting financial goals. Actions such as electing annual payments rather than pricier monthly payments or shopping at warehouse retailers to buy in bulk can make a difference.
It is also prudent to think through any upcoming purchases you have considered, especially if they are large ones. It would make sense to lock in the price before any potential price increases.
If you are concerned that your income will not keep pace with the current inflation, consider exploring ways to increase your revenue. For example, requesting a raise, learning new and valuable skills, or even changing jobs if that is an option could add some additional money and help buffer against the high costs of inflation.
Debt and Asset
Be aware of your variable interest rate debt, and be sure you understand how the interest rate may be affected by inflation. If it fits your situation, consider paying down variable interest rate debts or switching them to fixed-rate debts. Also, if you are planning on financing an upcoming sizeable purchase, it is wise to expedite this process before any considerable jumps in rates.
Take some time to look at your cash holdings. It’s a good idea to keep an eye on your emergency fund, for example, and be mindful of possible options for parking your money during times of high inflation, such as high-yield checking or savings accounts or short-term CDs. Consider finding investments for your surplus cash rather than waiting for rates to go up before putting your money to work may leave you at risk of mistiming the markets.
Tax
In light of high inflation, you may need to review your current and potential income tax brackets. In doing so, you can spot possible changes in your effective tax rate. In addition, this will allow you to plan successfully with specific strategies, such as utilizing pre-tax or ROTH contributions. It’s also important to be aware of areas of the tax code that don’t receive inflationary adjustments, such as SALT limitations and Social Security taxability, so you can reflect on how this may impact specific tax strategies in this environment.
Also, your taxable accounts may be experiencing heavy volatility due to this period of high inflation. If so, you may discuss with your fiduciary financial advisor methods to rebalance your portfolio at a reduced tax cost, such as selling particular securities at lower capital gains or harvesting short-term losses you may have incurred. However, your advisor must consider the $3,000 ordinary income offset limit on capital losses and wash sale rules.
Insurance
Due to inflationary rising costs, the need to replace a higher income or higher living expenses may necessitate a review of your insurance policies to ensure you have adequate coverage.
Additionally, reviewing your policies for your homeowners, vehicle, and personal goods would be wise to protect yourself against inflation since the replacement costs of these possessions will likely have risen as well.
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