As individuals, there’s not much we can do to control inflation. Many of the forces at work are beyond even the monetary authorities’ ability to manage. We can only hope policymakers do what history says has been nearly impossible once inflation rises above 5%: cool the economy enough to cap inflation while not triggering a recession. But we can control how we respond to inflation. Earlier this month, we addressed this from the portfolio/investing side. Now, here are some things you can do to shore up your finances unrelated to your portfolio:
Inflation Ideas
1. Fix the Interest Rates on Your Debt
Governments typically try to arrest inflation by raising interest rates to cool down the economy. That means any liability you have with a variable or floating interest rate is an even bigger risk than usual. If rates rise far enough, fast enough, you can quickly get into trouble. Variable-rate mortgages are rarer these days, but if you hold one, you may want to consider switching to a fixed-rate mortgage if you’re able to do so. The same goes if you happen to have a private student loan with a variable interest rate. Credit cards have variable rates too; if you thought the APRs were high already, wait till you see what an inflationary spiral could do to them. If you weren’t already working hard to pay them down, it may be time to speed up your debt repayment timeline.
2. Lock in a Low Interest Rate for the Long Term
Homeowners have enjoyed historically low mortgage rates these past few years. Many have refinanced and locked in a great rate (a fixed rate, of course) for 15, 20, or 30 years. If you own a home and haven’t yet refinanced, rates are still low, but they have been rising sharply. Now, if you were thinking of purchasing a home and or moving soon, consider accelerating your plans if possible so you can lock in your rate and not miss out. If interest rates climb from here alongside inflation, you’ll be glad you locked in a mortgage rate for the long term while rates were still low.
3. Review Your Budget
Inflation means much of what we pay for is rising in price and may get more expensive. So look through your monthly spending again with a fine-tooth comb to see if there’s any place to cut back that won’t disrupt your quality of life. Energy and food prices are typically very sensitive to inflation, but these expense categories can also be the hardest to manage (unless you don’t mind skimping on heating and central air). But there might be something, no matter how small a line item, that you can eliminate as a luxury of low importance. The lower your expenses, the less vulnerable you are to inflation.
4. Strategically Defer Certain Purchases
While you’re reviewing your budget, also look for things, not to cut completely, but to defer. Think strategically. Large household goods (furniture, appliances, etc.) along with automobiles (used and new) have faced the steepest price increases. The price increases have been so high in these areas that it’s going to be hard for them to be sustained for much longer, at least at a similar pace. It might make sense to delay purchases in those categories if you can until the supply issues causing this inflation abate.
5. Employees: Negotiate
For the first time in a while, American workers have some leverage. Employers all over the country are finding it hard to fill positions. You’re in demand! Be respectful, but don’t be afraid to speak up for yourself and negotiate a fair inflation-based pay raise from your employer. Because if your wages don’t rise by at least inflation, you’re effectively receiving a pay cut. Don’t let employers suggest that inflation is temporary and thus doesn’t warrant a permanent salary increase. They may be right that inflation will calm down, but that doesn’t change the fact that the inflation we’ve already experienced is baked in the cake. No one is suggesting prices will reverse and go down, just that prices may not go up as much from here. So you need that level of increase to maintain your purchasing power. We’re rooting for you!
6. Owners of Rental Property: Review Your Assets
If you’re a real estate investor, you may depend on your property income to live or supplement your other income. As rent freezes and eviction moratoriums expire, it will be time to reassess your investments. It’s fair to raise rents to capture legitimate increases in maintenance costs and the lower buying power of future dollars due to inflation. But you’ll have to balance the desire for rent increases with the costs associated with tenant turnover.
Still Have Questions?
There may be several other actions to consider to further address inflation risks in your finances. We encourage you to reach out to your wealth manager. If you don’t already have one, send us a question about these inflation-related ideas or anything else at eric@hesperianwealth.com or schedule a free, no-obligation Discovery Meeting here.
Eric R. Figueroa, CFP®
I am a Folsom, CA, fee-only wealth manager serving the Greater Sacramento area, California Gold Country, and the nation virtually. I offer financial planning and investment management, specializing in impact investing and personalized values-based investing.
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), except where cited, which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.
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