Inflation and Your Money
Inflation is the general rising of prices which erodes our purchasing power. Normal inflation in the United States is 1-2% which means something that cost $1.00 last year now costs $1.02 this year. We can all see these effects over time, even my high school seniors have their own inflation stories.
Inflation in the last year and half looks a bit different for two reasons: 1)Through COVID government stimulus, over $6 trillion was added to the economy. 2) Due to COVID, there are massive supply chain issues worldwide. Both of these things are big contributors to inflation and why I think higher inflation is here to stay for a bit.
#1. If you are in a position to negotiate your salary or ask for a raise, you should! This is a good practice to be doing anyways but especially with inflation of 6.8%. Any raise would help but to keep up with inflation, you need a 6.8% raise (per November numbers).
#2. Consider moving some of your emergency fund to an IBOND. Emergency funds (3-6 months of living expenses) are essential but savings accounts are only paying between 0.01-0.50% right now. IBONDS are a savings investment that is attached to inflation and currently paying 7.12%! You are limited to $10,000 per social security number per year. With the end of the year coming, you could buy some now and more in January. If you withdraw your money before 1 year, you still get your money back and only lose 3 months of interest. FYI, you buy these bonds through the Treasury Department, not in your investment account. Do your own research to see if this is right for you.
#3. Use a high yield savings account (HYSA). These are offered through online banks like Ally or Varo. Their interest rates are correlated to the interest rate set by the Federal Reserve which is currently zero or close to zero. Although these banks are only paying 0.50% on their savings accounts right now (which is 50 times what Wells Fargo pays at 0.01%), this rate will increase when the Fed starts raising interest rates to fight inflation. The savings rate on our Ally savings accounts was 2.5% before the Fed started lowering interest rates in 2019. You can keep your current bank accounts and just open a HYSA for most of your savings.
#4. Invest what you can. On average the S&P500 returns 10% per year. Some years this is more (as of 12/7/21 the S&P500 was up 26%) and some years this is less (see chart below). Savings is necessary but during a high inflation time it doesn't serve you to over save. [To my older and wiser generations, I know 6% is nothing compared to inflation of earlier decades]!
#5. Possibly Re Evaluate Your Financial Goals. For my family, our mortgage is our largest expense and something I would love to remove from our expenses. In early 2021 we refinanced to a 15 year mortgage and I was putting any extra income to pay down the principle (this is on top of our payment). The interest rate on our mortgage is 2.375%, yet inflation is 6.8%. Due to the increase in inflation, it no longer financially makes sense to continue putting extra money to paying off our mortgage early. This is still one of my financial goals but now I am investing this extra money instead with the hope of pulling out a lump sum to do an early payoff in the future.