Stay on top of rising inflation

September 21, 2022

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As inflation rates have increasingly occupied our attention and our weekly news cycles, we are all aware of the impacts inflation is having on our economy today. Too little of this coverage has considered what people can do to take action and mitigate inflation's impact on their budgeting, assets, or tax planning. This article hopes to remedy that by orienting you around the actions worth taking in this intrepid time.

Simply put, inflation occurs when production costs rise and when that increase is passed on to the consumer. There are a number of factors that can muddy the waters, such as pandemic-induced supply chain issues, or price-gouging by opportunists hoping to wring out extra profits amidst chaotic situations. The bottom line is that the costs of living your daily life go up, and inadequate planning could have an unpleasant domino effect on financial outlooks.

Cash Flow & Budgeting

Reassessing your living expenses with high inflation in mind starts by accounting for how your personal expenses have changed relative to the general cost of inflation. As they go up, you may need to adjust your emergency funds to ensure that they will still cover the mishaps or misfortunes they were set aside for. Savings could be found in your necessary expenses, where it might be prudent to buy goods in bulk or switch to annual payments on subscriptions as well as freeing up your cashflow by reconsidering unnecessary expenses. If you've been anticipating or considering upcoming purchases, it may be worth pulling the trigger on purchases to ensure a lower price on items that may be subject to price increases.

If you are working, remember that an annual raise that does not meet inflation is effectively a pay cut. While your employer may not be keen to match inflation at this rate, it never hurts to ask! More and more, changing jobs is becoming the standard way that workers can ensure better pay and career advancement.

For retirees, your retirement income sources will vary in how they are impacted by rising inflation. Social Security benefits provide a unique hedge against inflation through built-in cost of living adjustments (COLA). It may be worth delaying your benefits to potentially increase both the level of income subject to COLA adjustments as well as your overall income. Annuities with increasing income benefits, although starting lower than fixed-income annuities, will eventually exceed the fixed-income options. Retirees that understand when those increased options kick in might have found a helpful inflation hedge.

Assets, Debts, & Taxes

High inflation could also draw to focus increased levels of interest-rate risk associated with a high fixed-income allocation. If appropriate, maintaining, or increasing exposure to equities or asset classes that might be more resilient to inflation is worth considering.

It is also worth being attentive to the risks of high cash holdings during times of high inflation. Other options such as high-yield accounts might offer better growth for your cash holdings, and surplus cash could be worth investing to stay at work for you and mitigate market timing risks.

Variable-interest-rate debts should be understood for how they are calculated and the extent to which inflation may impact increases in rate. Paying down or refinancing to fixed rates may be worth considering to potentially lock in a lower interest rate.

It is worth considering how you might rebalance portfolios at reduced tax cost if your taxable accounts have experienced volatility due to high inflation. Such volatility could make it prudent for you to review your anticipated tax brackets as well.

In Conclusion

These are just a few of the many considerations for saving, hedging against inflation, and self-preservation. If inflation has you concerned, speak to your financial professional for personalized recommendations.

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