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How Inflation Rates Might be Impacting Your Financial Plan (And 5 Things You Can do About It)

How Inflation Rates Might be Impacting Your Financial Plan (And 5 Things You Can do About It)

August 14, 2023

Let’s face it – inflation is just a part of life. For most of us, we’re used to the slow creep of maybe around 1 – 2% each year. However, what we’re experiencing now feels a little…well…painful. That’s because over the last 10 years, inflation has averaged 1.8%. In 2022, it hit 8.1%.

While the last 10 years have seen below-average inflation rates, the 20th century has seen periods of extreme inflation and deflation, including the Great Depression that began in 1929 and the Great Inflation that began in the mid-1960s and didn't break until the mid-1980s. (Forbes)

This means that for some of us, we’re experiencing a huge fluctuation for the first time in our working lives. For others, we’re experiencing this just as we’re trying to retire (or live within our retirement income).

But there are things you can do. Below I’ve outlined 5 things to consider as we weather this latest economic storm.


Invest in assets designed to outpace inflation.

It is not uncommon for me to meet with a potential client who is keeping $100,000 or more in their savings account at the bank. Most brick-and-mortar banks are still paying low interest rates on their savings accounts – 1%, 2% etc. These rates are well below inflation.

Consider investing in assets that are designed to outpace inflation. I recommend that all of my clients keep three to six months’ worth of their expenses in a cash reserve, but when you keep more than that, you could be losing money safely. I say this because your purchasing power goes down with inflation. If inflation is at 4% and you are earning 1%, you’ve lost 3% of your purchasing power over the course of the year.


Invest in inflation-protected securities.

The most common inflation-protected bonds that we see are called TIPS – Treasury Inflation Protected Securities*. These bonds have a base interest rate plus the rate of inflation. They give a much higher interest rate when inflation spikes and their interest rate drops when inflation is low.


Review and adjust your budget.

Inflation can cause the cost of goods and services to rise, which can put a strain on your budget. It's important to periodically review your budget and make adjustments to account for the rising cost of living. This may mean cutting back on discretionary spending or finding ways to save on everyday expenses like groceries or utilities. By making small adjustments to your budget, you can help ensure that you're not caught off guard by inflation.


Pay down high-interest debt.

Turning to credit cards isn’t the answer to an increased cost of living: the higher the inflation rate, the higher the interest rates on loans and credit cards. By paying down high-interest debt, you can reduce the amount of interest you pay over time and free up cash flow to invest in assets that outpace inflation.


Seek professional advice.

When we experience ups and downs in the market or inflation rates as we have in the last few years, this is when the long-term advice you’ve received from your financial advisor does the hard work. A financial advisor can help you develop a comprehensive financial plan that takes into account your goals, risk tolerance, and the current economic climate. They can also offer guidance on investment strategies, budgeting, and debt management, all of which can help you combat the effects of inflation.

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*TIPS have different cash flow characteristics than nominal fixed income securities. TIPS offer a lower current return to compensate for the inflation protection than comparable Treasuries. The inflation adjustments to the principal is taxable in the year in which such adjustments occurs even through you won’t receive your inflation-adjusted principal until the security matures.