The Top 3 Things You Can Do About Inflation
Inflation is higher than it’s been in over 40 years! You’ve seen it at the gas pump, in the grocery store, and everywhere in between. As of May, the US Consumer Price Index (CPI) rose 8.6% over the last 12 months, the most since 1981.
What is inflation? Inflation is the rate at which the general level of prices for goods and services, such as the CPI, is rising. The items used to measure inflation are typical items we all consume, such as food, transportation, healthcare, and energy. As the rate of inflation increases, your dollar simply doesn’t go as far.
Since these high levels of inflation have not been seen in a long time, you may not have lived in this kind of environment. To get a better understanding of what it is like to live through a high inflation period, and a first hand account, ask your parents, grandparents, aunts, and uncles who lived through it.
After getting some guidance and some great storytelling from your family, here are three things that you can do about rising inflation.
1. Get a Pay Increase
If your paycheck did not increase by more than 8.6% from last year, you experienced a paycut. Ask your boss for a cost of living adjustment to rectify the situation. While you’re at it, ask for a raise! The job market is extremely tight, inflation could go higher and persist for a long time, so make a strong case for a raise.
Asking for a raise is hard. It has to be done at the right time and when your manager is in the right mood. I’ve helped several clients construct proposals around getting a raise. It can be a very delicate situation, and I would love to work with you to understand your role, company, boss, and work environment to help you get a raise!
2. Develop a Plan to Save More Money
Just like a pay increase, you should save more money as inflation increases. If you get a 10% increase in salary, you should be able to save some more money for your own benefit. If you have trouble saving money during inflationary times or saving money in general, I work with clients to help them understand where the money is going. Developing a cash management strategy will help you have enough cash on hand to meet spending obligations while not leaving too much money in low yielding savings accounts, whose rates are well below inflation.
Broader inflation is over 8%, but assess your personal inflation rate. Different goods and services are increasing at different rates. For example, in the past year, tomato prices have increased 2.0%, while cookies are up 12.6%. I can work with you to determine your personal inflation rate to put you in a better place to withstand the current inflationary pressures and improve your situation for the long term.
Separately, the government agrees about saving more money. Every year or two, retirement savings account contribution limits increase. For example, in 2022, the employee contribution for 401(k) and 403(b) increased from $19,500 to $20,500. The extra $1,000 helps combat inflation and it will be worth a lot more when you’re retired.
3. Invest Properly During an Inflationary Market
Your investment portfolio must take enough risk to outpace inflation. The majority of your assets should be stock index funds and equities. In an inflationary environment, companies typically pass along price increases for goods and services to their customers. As an owner of these companies through equity and stock index fund ownership, you reap the benefit of these price increases.
These are tricky times to invest. Many times people want the stability of fixed income returns. Especially when the stock market is down, many people flock to fixed income for safety and consistent yield. However, in this environment, with yields so low and inflation so high, you are losing money. For example, if your fixed income investment pays you 2% and inflation is 8.6%, you are losing 6.6% instantaneously, without taking into account any taxes or investment risk.
When investing in the equity of high quality companies, you own a portion of a great business. You get the benefits of potentially higher earnings from price increases during inflationary periods, dividend payments that typically increase over time, and the possibility for stock price appreciation. As a point of comparison, bonds don’t grow and neither does their income. Performance in your fixed income and equity investments will diverge tremendously in an inflationary environment.
Furthermore, fixed income returns are taxed at your ordinary income tax rate, which can be as high as 37%. Whereas, if you hold a stock long enough, (at least 60 days out of a 121 day holding period), the dividends are taxed as qualified dividends, at 15% or 20%.
Importance of Equity Ownership
When you receive forms of equity ownership from your employer, it’s best to determine exactly what you own. Is your equity ISOs, NSOs, or RSUs? Are they vested? If so, how do they impact your investment portfolio? What are their tax implications?
Understanding the impact of equity ownership of your employer’s stock and how it fits into your financial picture and investment portfolio are very important. Using equity ownership to your advantage can help you reach your goals in a shorter time frame, especially in an inflationary environment.
If you are feeling anxious about how inflation can impact you, your portfolio, and your financial goals, email me at [email protected], or schedule a free consultation.