Resources/Planning Best Practices

JUNE 2024

Navigating Inflation: Smart Financial Planning for a Stable Future

Justin Hearty

Your financial plan will always be battling inflation, but you can implement a few precautions to ensure your plan continues to win!

Inflation is an unavoidable economic factor that affects our purchasing power and financial stability. As prices of goods and services rise, it’s essential to adapt our financial strategies to protect our wealth. This guide will help you navigate inflation and manage your expenses effectively.

What is Inflation and Why Does it Matter?

Inflation is the overall increase in prices over time, reducing the value of money. In simpler terms, your dollar doesn’t stretch as far as it used to. This impacts everyone, especially those on fixed incomes or those with significant savings in low-interest accounts.

Measured by the Consumer Price Index (CPI), inflation tracks the price change of a basket of goods and services such as food, housing, and healthcare. The Federal Reserve targets a 2% annual inflation rate, considering it healthy for the economy. Although inflation has exceeded the Fed’s target since 2021, the good news is that it has been gradually decreasing from its peak.

Keeping Your Plan on Track Amid Inflation

Given the changes in consumer spending and saving, and the challenges posed by inflation, it is important for consumers to plan their finances wisely and adapt to the changing economic environment. Here are some tips on how to do so:

Track Your Income and Expenses

Use budgeting tools to record your earnings and spending. Categorize expenses into fixed (e.g., rent, utilities) and variable costs (e.g., groceries, entertainment). Understanding your cash flow is the first step in managing finances. Regularly review your budget to identify areas where you might be overspending and make adjustments as necessary. This helps ensure that you are living within your means and can identify opportunities to save or invest more effectively. Additionally, keeping an eye on your cash flow can alert you to any potential financial issues early on, allowing you to address them before they become significant problems.

Adjusting Habits

If inflation outpaces your income, it’s essential to adjust your spending and saving habits accordingly. Focus on reducing variable expenses without compromising your quality of life. Consider prioritizing essential spending and looking for ways to streamline your budget. For example, review your subscriptions and memberships to see if there are any you no longer use or need.

On the flip side, if your income grows faster than inflation, it’s a good opportunity to increase your savings or invest in personal growth. Allocate additional income towards your savings goals, such as retirement funds, emergency savings, or educational expenses. You might also consider investing in professional development or skills training, which can enhance your earning potential in the long run.

Ensure Your Portfolio Aligns with Your Risk Tolerance

Safeguarding your purchasing power in the face of inflation means ensuring that your investment portfolio aligns with your current risk tolerance and financial goals. Regularly review your asset allocation to ensure that it not only reflects your risk tolerance and time horizon but can meet your financial objectives after factoring in inflation.

Do Not Forget About Your Need to Take Risk

We often talk about evaluating your willingness to take investment risk as well as your ability. These should be assessed regularly as life changes and economic conditions can affect both. But there is a third tier of the risk assessment that is less obvious – your need – and inflation can have a meaningful impact here.

A Case Study in Risk Need

Let’s imagine you are fairly well off and have a very low willingness to take on investment risk but have a high ability to take on risk. You have constructed a fixed income portfolio that gives you the returns and income you feel you need to retire comfortably. But now inflation kicks in. Suddenly the returns on your fixed income portfolio are growing more slowly than the cost of living. Your investment portfolio is not keeping up with inflation and your retirement plan is off track. You have a need to take more risk in your investments to earn a higher return.

What Exactly Do We Mean by Risk?

In investing, risk is often simplistically thought of as the volatility of your assets; how much they go up and down. Why would you want more risk? Generally, the goal with more risk is more return. In a very basic portfolio, you can get more risk by adding to equities and reduce risk by adding to high quality bonds. As such, the higher return potential in equities can help a portfolio combat inflation. Other alternative assets such as gold also can help.

Seek Professional Advice

Factoring inflation into your financial plan is not a trivial exercise. Consulting with a financial advisor can help you evaluate your risk tolerance, review your portfolio, and recommend adjustments to ensure that inflation does not derail your financial plan.

Conclusion

Inflation impacts everyone’s finances, but with careful planning, you can protect your purchasing power and achieve your financial goals. By tracking your finances, adjusting your habits and properly aligning your portfolio, you can navigate the challenges of inflation and maintain financial stability.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.