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Unfortunately, TikTok and the stock market weren’t the only things on the rise these past few years — inflation joined the party, too.
A few things play into this, starting with an increase in prices and a decrease in purchasing power. So with a mixture of stimulus checks and supply chain issues caused by the COVID-19 pandemic, we were looking at the perfect recipe for inflation. And in November 2021, the measure of the price of goods and services, known as the consumer price index (or CPI), increased 0.5%. Throughout the whole of 2021, it rose 6.8% — the biggest increase in 39 years.
Although these higher inflation rates will likely persist this year, they will probably level out in the coming years. This means you have less cause for worry about the effects of inflation on the stock market and your individual financial life. Regardless, I know how scary it can be scrolling through Twitter and seeing everyone commenting on how terrible the recent trends in inflation are. But as Warren Buffett famously said, we should be fearful when others are greedy, but greedy when others are fearful.
If you know how to make smart investment decisions and have a plan for your money (without letting inflation trends get in the way), you’ll set yourself up for success no matter what.
How to Make Smart Investment Decisions With Inflation on the Rise
Unless you got a 6.8% raise last year to match the rise in CPI, your dollar probably doesn’t stretch as far as it used to. This also means you might find it harder to sustain the same lifestyle and come up with a financial plan. Here are some steps for handling your money wisely so inflation doesn’t erode your wealth:
1. Know what you want — and plan for it
As the Nigerian proverb goes, “Whoever fails to plan is planning to fail.” Given recent inflation trends, it’s important to think ahead about what you want your money to do. If you want to purchase a house within the next year, for example, the best thing to do is hold the down payment in cash due to the risk of stock market declines over a short period of time. If you decided to purchase a home and had spent the past five years saving and investing, then you would have the chance to not only experience market growth, but also to also lock in realized gains by selling riskier assets as you got closer to purchase time.
This example shows the importance of planning for future purchases rather than making spur-of-the-moment decisions, as the market is always changing. Consider that someone who had $200,000 to purchase a house in 2018, but waited for some market stability, has found that their original investment would be worth $350,000 today. However, if they kept the value in cash, that $200,000 would be worth the same amount today. This person has accidentally priced themselves out of previously affordable homes due to unforeseen inflation trends.
2. Reset your expectations for housing
Southern California has beautiful weather all year, great nightlife, a booming tech industry and influential people. You’d be hard-pressed to find a person who hasn’t thought about moving there. But for most young professionals, the reality is that we can’t afford a home there — or in other expensive housing markets. Even with the high percentage of people leaving California for cheaper pastures, housing prices in the state’s major cities are still on the rise. Case in point: Southern California’s home prices jumped nearly 16% year over year in November 2021.
However, small towns such as Abernathy, Texas — which has a median listing home price of $147,500 — haven’t experienced the home price increases that Southern California’s cities and other major cities have. And the difference in affordability is years of savings, which leaves money for other goals like retirement, travel, college funds and more. Reset your expectations of where you can afford to live so you can have a plan for your money that goes beyond paying for housing.
3. Strike the right balance when it comes to investing
If all your assets were in cash during the 2008 financial crisis, you were seen as a genius. But recessions don’t typically last 15 years, and the same goes for high inflation rates. That’s why we shouldn’t just hold all of our money in cash — especially considering that we just experienced one of the best bull markets in history. This doesn’t mean, however, that cash is bad and that we should never have it in our savings accounts. A 6% increase in inflation eroding your cash is better than a 20% loss in the volatile stock market. The point is that you want to reach the right balance of asset diversification to make smart investment decisions whether inflation is on the rise or not.
Investing with a specific strategy will take what you have and mold it into a plan that fits the aggressiveness or conservativeness necessary to reach your goal. Regardless of how aggressive your investing plan is, the sole intention is to maintain and increase purchasing power. Similar to how a 529 college savings plan works, the best investment strategy is to have more exposure in the beginning and, as the time of college (or whatever your goal is) approaches, you reduce the exposure, which subsequently locks in unrealized gains. Additionally, even though this lowers the chance for potential gains, it also lowers the chance for potential losses.
The biggest inflation trend is that it never fully goes away, as no asset’s value is forever consistent. It’s something we’ll have to deal with for the rest of our lives, which is why having a plan for your money is invaluable — it aligns your goals with a strategy that takes inflation into account. If you spend less than you make and properly invest, you’ll find yourself on the right side of financial health no matter what happens with inflation.
Odaro Aisueni is a first-generation Nigerian American who grew up in Houston, Texas, and currently works as a financial planner at Plancorp, a full-service wealth management company serving families in 44 states. Odaro studied personal financial planning at Texas Tech University, the No. 1 financial planning program in the nation. There, he grew a passion for financial education. He now aims to equip young generations with financial knowledge and offer financial truths with a mix of entertainment.
Equities News Contributor: Odaro Aisueni
Source: Equities News