Broker Check


August 02, 2021

Inflation is like gravity. You may not understand it, you may not believe in it, you may not like it, but you will live your life in a world impacted by it. Therefore, like it or not it is relevant. But is it going to wreck your financial life? The honest answer is yes and no.

First, what is inflation? My name isn’t Webster but let’s try this…Inflation is the general rise in prices across an economy, over time, that causes your unit of currency (dollar, Yen, Euro, etc...) to buy less (goods or services). You don’t need an Ivy League MBA to know that most things cost more today than they did 5,10, 20 years ago. That’s inflation. And if your income doesn’t increase and or your assets don’t grow at a rate (after tax) that at least matches the rate of inflation your lifestyle begins to diminish. That can be a problem.

Now for some critical thinking. The most common published and referenced measure of inflation is the Consumer Price Index (CPI). It’s a measure, using a weighted average, of the increase in the price level of a basket or collection of goods and services. Now an important part. You, meaning you the individual, don’t get to pick what the Bureau of Labor Statistics puts in the basket that is being measured. Most people would respond with, “So what.” Allow me to ask you this, “Have your spending habits changed over time? There may have been a time when your focus was putting gas in the car for the weekend. Remember those days? Then maybe it was gas, beer and pizza money. Then maybe you moved on to student loans, a home purchase and possibly kids. Later in life it seems to be much to do about health care. My point, our consumption patterns change over the course of our lives and the degree to which some average number impacts how we live also changes. Inflation tends to hit retirees much harder than the general working population. Why, because they tend to spend a larger portion of their income on goods and services that are rising at a rate greater than the CPI. Look no further than health care. (But we fixed that right?)

We can’t control every variable in the economy. Personal finance is no different than most other aspects of our lives. We will do much better and feel much better if we focus on what we can control. If inflation is on your mind, here are a few thoughts. One, your saving rate may be the most important number in your entire financial plan. If you are not saving the appropriate amount of your gross income don’t bother yourself with worrying about inflation, rates of return or the number of stars your funds have. It isn’t going to help you. Two, make sure your long-term money is allocated in a way that gives you a real chance to grow, after tax, at a rate greater than the CPI. This usually requires a meaningful allocation to stocks. Three, look back and then look forward and ask yourself, “How will my income increase over the coming years?” For earners, you want to be mindful of your cost of living increases (or lack there of), raises and bonuses. You can’t manage what you don’t measure. For those no longer working, revisit your investment strategy and identify how and where you may be able to increase your long-term income without adding risk. The best way to address inflation over the course of your life is to have a plan and incorporate a base line inflation rate and then revisit that plan at least annually. Then you can go about the things that should be more important to you. Like how you want to Allocate your time. After all it is your most valuable asset.