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How Inflation Will Affect Your Wallet & What You Can Do About It

How Inflation Will Affect Your Wallet & What You Can Do About It

June 06, 2022
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Everywhere you turn right now, the economic outlook seems grim - inflation, interest rates, government spending, the deficit, a looming recession. How do we make sense of the chaos unfolding before our eyes?

Now can feel like a difficult moment for anyone who has or will be investing money, and even for those who haven’t.

Have hope.


“I have a great belief in the fact that whenever there is chaos,

it creates wonderful thinking.”

-Septima Poinsette Clark


It’s time to get creative and intentional about how we handle the big economic changes coming at us on a weekly, sometimes daily, basis.

The first step in creating order from chaos is to understand what we are dealing with.

Looking Back Just a Few Years

Remember back to 2019? We didn’t know what was coming, did we?

Three years later and we’ve experienced multiple once-in-a-lifetime events that most of us could have never imagined experiencing.

A global pandemic. A divisive political landscape in the U.S. and abroad. Global supply chain disruptions. Record-breaking unemployment rates caused by covid shutdowns.

And all of this in just a few years.

What Does This Mean for Where Things Stand Today?

Due to the prolonged disruption of the COVID-19 shutdown, the federal government increased money supply by 40% in just two years to sustain and then restart the economy with stimulus funding.

If the US tomato crop were 40% larger over two years, the value of each tomato would decrease. Similarly, increasing the number of dollars by 40% has decreased the value of each single dollar.

That is the definition of inflation.

Although we were initially told that inflation would go away when the supply chain problems eased up, it’s now evident that it will not be going away any time soon.

Today’s annual rate of 6% to 8% (depending on which index you follow), is signaling that interest rate increases, which have already been initiated, will continue to come at us throughout the rest of this year, possibly beyond.

Supply chain problems are starting to ease up, but slowly. The economic shutdown, however, created a larger problem than just supply chain issues, and economists will study the shutdown and recovery for decades to come. 

As a result of the shutdown, and the subsequent overspending that occurred, the federal government is $30 trillion in debt.  Federal, state, and local governments reportedly also have $80 trillion of unfunded liabilities, and inflation offers the government a way to ‘pay back’ deficits with less valuable dollars in the future.

Which means that inflation will likely be with us for a while.

What You Can Do to Weather the Inflation Storm

Going back to creating order out of chaos, below are a few ways that you can be smart and make the most out of this new economic landscape.

HUG YOUR MORTGAGE

That new 2-1/2% to 3-1/2% mortgage you were approved for in the last few years may be the best ‘asset’ you own. That mortgage rate is fixed for thirty years, at a lower cost than inflation. Amazing.

You, like the politicians, will be paying that loan back with less valuable dollars!

And you purchased a home - a tangible asset that will likely continue to grow in value long term - just as houses did in the 1970’s and 1980’s.  

For those who don’t own their home (yet), mortgage rates are currently climbing over 5% for the foreseeable future, making the affordability of buying a house today much more difficult. Rate increases should, however, reduce the competition in what is currently a white-hot real estate market.

While you’re waiting for the right deal to come along, there are a few things you can do. Know your market. Be patient. Talk to your landlord – can you buy what you rent? Be persistent, keep at it. Buy a deal, a fixer. Don’t fall in love with a house, buy well. There will always be deals to be had!

Although a 5% mortgage sounds high, even a 5% mortgage is less than current inflation. Be prepared to refinance in those brief moments when mortgage rates have a temporary fall.

BONDS AND CD’s

The traditional investment of retirees - interest earned on bonds and CDs - funded the leisure years of many prior to the 1970’s.  The 1970’s, however, crushed those living on a ‘fixed income’ as their income did not increase each year with inflation.

For example, if the Cost of Living (i.e., 'inflation’) is truly growing at 8% per year, and your CDs are paying 2% - you are actually losing 6% of your portfolio’s purchasing power each year. In ten years, your purchasing power could be cut in half.

Bonds and CDs are important for quick liquidity and for the relative stability in your portfolio, but don’t ‘overdo’ this asset class.

THE STOCK MARKET

The stock market has traditionally fared well during times of inflation, but some believe the era of easy-index fund investing is ending. This is because some indexes are heavily influenced by highly priced, massive technology ‘growth’ stocks, which have grown dramatically in the federal ‘easy-money' years since 2008.

Also, there is a growing consensus that the Warren-Buffett style 'Value Investing' may become more successful as inflation rises.

Also, expect a lot of discussion favoring dividend-paying stocks, REIT’s (commercial real estate), utilities and high dividend industrial and consumer goods companies coming back into vogue.

What does all this mean?

It may be a good time for a financial manager to exercise judgment over your portfolio, rather than an index-fund computer, despite somewhat higher investment costs.

Unfortunately, at 92, Mr. Buffett is not taking new clients.

THE HAVES AND THE HAVE-NOTS

One thing that becomes more evident during periods of inflation and rising interest rates is that economic changes affect everyone differently.

High earners don’t have to drastically change their lifestyle. Whether it costs $50 or $80 to fill a gas tank, a corporate attorney doesn’t notice too much. If you own your home, which most middle to upper-middle class earners do, your rent won’t rise.  

Unfortunately, those who already struggle during a strong economy will be hit even harder by inflation. Quickly rising rents, high gas prices and rising food costs will quickly erode the lifestyle of the bottom 20%.

And there is not enough government money to cover the costs of all those who will suffer the most.

Now is when we need to help those who are in need, and now is when we can really make a difference.

Volunteer where you think it will matter. Inspire youth to study and stay drug free. Donate to charities that truly make a difference. 

Our country was built on a foundation of giving. We will need to tap into this spirit of helping others more than ever in the next decade and beyond.



If you have any questions about inflation, rising interest rates, and what you can do to protect your financial future, we’d be happy to have a conversation.