Is Inflation on Your Mind? Here Are 4 Tips on How to Face It

Inflation, at some level, is here to stay. It affects each of us differently at different stages of our lives. Being prepared for it at each stage is the key.

When we talk about inflation, we want to look at two things: today and tomorrow.

• What is the current impact of inflation on our everyday life?
• What can we do now to help mitigate the current effects on our household spending and our long-term retirement savings?

Inflation measures how fast prices for goods and services, such as food, housing, clothing, gas, etc., are increasing. Your age and circumstances will determine how you will be impacted by various changes. Younger folks will likely feel increases related to housing costs, whereas older folks may be more vulnerable to rising healthcare costs.

So, what can we do to prepare?

1. 50/30/20 Rule 

What is the 50/30/20 Rule? The 50/30/20 Rule is a set of simple guidelines for how to handle your expenses. With this approach, you allocate your income to the following categories.  

50% to Needs - Things that you can’t live without   

• Rent or mortgage and other related housing costs
• Food
• Healthcare
• Transportation  

30% to Wants - Things that you could live without

• Hobbies   
• Vacations   
• Dining out   
• Entertainment 

20% to Savings Goals and Debt Repayment  

• All savings, such as retirement contributions, saving for a house or future education expenses
• Debt payments   

The 50/30/20 Rule can be an excellent place to start considering an overall budget. Of course, the actual specifics of that budget will change over time with inflation to reflect the current prices of necessities, but keeping this structure in mind can help you create a plan that fits your income and expenses.

Expect the unexpected. A great way to prepare for inflation is to build it into your budget. If you plan and make room for inevitable increases, you’re more likely to reach your goals even when facing unprecedented surges.

2. Be Proactive 

There are a few things one can consider when trying to combat inflation. Paying off variable debt can be a huge relief. This can include things like variable interest rate credit cards and lines of credit. When inflation rises, variable interest rates often do too. It may not always be the best option, but if you find that your variable interest is getting out of hand, consider seeking alternatives where the rate is fixed and potentially lower.

Audit yourself regularly. Take inventory of how close you are to 50/30/20. Often, we find ourselves paying for things we either didn’t know about or no longer need. Similarly, these audits help you identify what you can replace, eliminate, or look for a better deal elsewhere.

3. Invest For & In Retirement

Regardless of what happens over time, you want to ensure that you are actively preparing for your retirement. When investing for retirement, you should choose an investment allocation that matches both your need for growth and your ability to tolerate risk.

Unless you are very close to retirement age, you should typically have most of your money in growth-oriented investments. Even after retirement, due to the impact of inflation, you will still need to have some of your assets positioned for growth. Americans today are living longer than ever before. If you retire at age 65 and live to age 90, that means you will have your retirement savings invested for 25 years.

Your investment allocation decisions will be important, which is why seeking the guidance of a financial advisor can help you find ways to maximize your returns.

4. Don’t Panic

Inflation surges can feel frightening, especially when the cost of your daily essentials start to feel out of control. But when it comes to investments, attempting to time the market or make sudden and impulsive moves rarely ends well. Investing means there will be periods of volatility which often mean wide swings in the value of your assets.

Historically, stocks have outpaced inflation though, making it more beneficial to stick with your pre-determined allocation. Historically, Investors who panic and sell could miss the upside when markets eventually rebound.

For tips on protecting your retirement savings, check out Market Volatility and Your Retirement Savings to give you peace of mind when it comes to your financial wellbeing. 

Are you looking for more financial topics? Our Financial Academy page has you covered! Find helpful resources to help you do your best work and live your best life. 

Investment advice offered by OneDigital Investment Advisors LLC, a wholly owned subsidiary of OneDigital.