Inflation “swindles almost everybody.”
–Warren Buffett
I have seen inflation before, but it was long ago.
I noticed it when ever-rising prices caused home mortgage rates to hit fourteen percent (not a joke). That made buying my first house difficult.
On the plus side, money market funds could earn 18 percent then. That was great—if you had money. Most people did not. Inflation had made them poor.
Fortunately, those days are long gone.
However, nothing lasts forever. Like an ugly, foul-mouthed uncle who unexpectedly shows up at the family reunion, inflation, and rising interest rates, are back. So, it is important to know what to do.
WHAT INFLATION IS AND WHAT IT DOES
For me, inflation is like watching yourself get poorer, even when you make more money.
A technical explanation is that inflation measures the rate of rising prices—the rate changes when prices increase due to increasing production costs. A surge in demand can cause inflation because people will pay more for a product. A limited supply (as was the case in the pandemic) can cause inflation too. Either way, it is like a salary cut when your wages do not rise as fast as your expenses and the items you need to buy. Paying six dollars a gallon for gas is a good example.
To tame inflation, the Federal Reserve has to raise interest rates. That helps to restrict demand since fewer people can afford to buy the houses, cars, vacations, etc., they want. According to some recent data, we are already feeling the effects of recent rate hikes.
However, the biggest problem is that the rise in interest rates can throw the economy into a recession. And recessions are hard on everyone. People become unemployed and lose their jobs altogether.
But, what to do about inflation and a possible recession? Well, I surveyed sources online, and a consensus for action has emerged among various experts. I have added a few thoughts of my own.
NO. 1 STAY HEALTHY
I know this sounds trite, but it is vitally important.
Without good health, you cannot work and earn an income. Worse, if you also spend large amounts of money on your health, you can quickly go through your savings.
Medical bills are the number one cause of bankruptcy.
So, do whatever you need to do to stay healthy. Finances are much more challenging during a recession, and jobs are harder to get. Good health helps you to get through those times.
Besides, health is critical for your well-being and happiness.
NO. 2 EVALUATE YOUR RISK
When times are good, I have a lot of courage.
But now, with a recent 20 percent stock market haircut, it is important to review my holdings. You should too.
One blogger came up with a way to evaluate risk and investment that is worth your consideration. See here.
I have a feeling his upcoming book will be excellent too.
NO 3. ADJUST YOUR INVESTMENTS TO THE RIGHT TIME FRAME
One of the riskiest things to do is to invest for the long term in stocks and bonds when you will need the money right away.
For instance, one of my family members will be finishing grad school in the upcoming year. Now, I like the stock market as an investment tool, but not to help fund tuition. So, to be completely safe, I have the tuition cost in a money market fund. After all, what if I invested in the stock market six months ago and it remained 20 percent off its highs? Where would I get the money to make up the difference?
I don’t want to say to my children: “you know how we avoided student loans for your education? Unfortunately, you may need to get one because I made a poor decision.”
Conversely, the ups and downs in the stock market are upsetting even if you are not close to retirement. But if you won’t retire for several decades and won’t need the money until that time, it does not matter much what your IRA is doing in the meantime. Stocks are an excellent long-term investment. Consult with a professional before you sell out or make changes to retirement accounts.
NO. 4 CHECK YOUR RESERVES
If things go wrong, you want money in the bank. But how much to keep there is a subject of debate. Here are some possibilities from some eminent sources:
(I still think one author is wrong about needing $5 million to retire).
NO. 5 STAY VISIBLE/LIKABLE AT WORK
If things get difficult in the economy, you want to be a person who is liked at work when the job-cutting ax comes out. We often think of overachievers at work as being the ones who survive each job cut. That is true enough. But being liked helps too.
It turns out that firing someone you know and like is much harder than it sounds. However, it is NOT hard to fire someone you dislike.
How can you be liked? Being polite, helpful, and cooperative is a good idea. But sometimes, those qualities are in the eye of the beholder. So, what matters?
It turns out that the key is being present. Others judge your likeability most based on whether you show up. To read about that, see here.
NO. 6 CONSIDER AN ASSET THAT RISES WITH INFLATION
Is it possible to use inflation to your advantage? Well, some people do. But, of course, it is not easy to pull that off, and there are risks involved in each of the strategies I will describe. Many people deal with the challenge of inflation in the following ways:
- Buy stocks with pricing power and low capital needs—this is a Buffett strategy; you can read about it here. Buffett’s current holdings are listed here. First, however, a warning: not much of anything is positive in the stock market at this writing. Also, Buffett holds significant amounts of cash and owns other businesses, not just stocks.
- Purchase tangible assets—the theory is that physical things—collectibles, gold, real estate, etc., do well with inflation. So, you own them, and you won’t be hurt as the prices go up. Needless to say, that works sometimes, and other times it does not. But, for whatever it is worth, I recently was surprised to find that some collectibles I own had benefitted from this trend. So, purchasing non-standard tangible assets is something to consider as part of an overall strategy.
- Purchase bonds or securities that are tied to inflation—when inflation rises, the payouts are higher. There are lots of different kinds of financial vehicles to accomplish this goal. Government bonds, which involve limited risk, are described here. That is very solid. But I am leery of many other kinds of financial products that involve inflation protection.
NO. 7 REVIEW AND CUT YOUR EXPENSES
How do you spend your money? As I have mentioned before, one of the first steps to finding out is to track your spending for a month. You may be surprised at your phone bills, repairs, and take-out dinner habits. so look at them hard with an eye toward saving money. Savings are a hedge against a recession.
Tracking expenses is a place to start.
But high-interest credit card debt needs to be paid back too. It is a significant cost.
NO. 8 CONTINUE TO DEVELOP YOUR SKILLS
Warren Buffett has said, “The best thing you can do is to be exceptionally good at something,” He has noted that when you consider high-value professions like doctors and lawyers, “(people) are going to give you some of what they produce in exchange for what you deliver.”
Skills, unlike the currency, are not subject to inflation pressures. To bolster that argument, he said, “Whatever abilities you have can’t be taken away from you. They can’t be inflated away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all.”
NO. 9 YES, DISCUSS AND REVIEW YOUR SITUATION WITH YOUR FINANCIAL FIDUCIARY
Surgeons don’t try to take out their own appendix, no matter how skilled they are. So, sometimes it is best not to try to do everything yourself (especially self-surgery). Getting a second opinion and or letting someone else handle your money is worth considering in a difficult inflationary environment.
Your circumstances may not match a one-size-fits-all post like this one, either. So a second opinion from a fiduciary is warranted. Besides, these nine ideas only hit the high points, and a fiduciary can let you know your options, weaknesses, and other issues you need to address.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: JEShoots
License: Unsplash