by Michael Berkhahn, CFP
Many Americans are grappling with sticker shock when comparing prices between now and five years ago. Besides sticker shock, many people can easily recall what prices were before the recent surge in inflation. Although prices have stabilized, they have not necessarily returned to previous levels, leaving many Americans struggling with the notion that inflation has subsided. Even though the inflation rate peaked in the summer of 2022, a recent survey by Northwestern Mutual reports that more than half (54%) of adults expect inflation to increase in 2024.
Consumers often gauge inflation solely by looking at prices, but that is a common misconception amongst Americans. In reality, inflation is the rate of change over time. Therefore, the fact that the inflation rate is coming down does not necessarily mean prices will be lower in the future. This misunderstanding has contributed to 65% of Americans feeling like they are living paycheck to paycheck.
To help Americans feel financially secure, below are a few suggestions for households to consider during inflationary periods:
Reevaluate Spending Habits
During higher periods of inflation, households should closely monitor their spending habits. By keeping a close eye on spending, families can gain more confidence in their monthly expenditures and quickly identify ways to cut back to stay within budget.
Optimize Savings
Your savings should work for you, not against you. In a high-interest-rate environment, households should take advantage of higher yields. If you have a large balance in a bank account, check the interest rate you are earning. If it’s low, consider alternatives like high-yield money market accounts or certificates of deposit (CDs).
Related: 5 Easy Ways to Gain Your Financial Independence
Pay Down Debt
Managing debt is key to feeling financially secure, but debt management becomes crucial in a rising interest rate environment. Consumers should be cautious of the impact of interest rate hikes on variable debt obligations, such as credit cards. As interest rates increase, these debts become more expensive. Consider eliminating or paying down debts with variable interest rates to alleviate that financial burden.
Review Your Investments
Investors should regularly monitor their portfolios to ensure their investments are appropriately invested based on current market conditions. In inflationary environments, certain sectors benefit more than others. Real assets like precious metals, energy, and infrastructure can provide a hedge against higher inflation.
Minimize Taxes
A solid financial plan should always include tax-efficient strategies. With rising interest rates, it can be advantageous to explore investment opportunities that could potentially lower future tax bills. In taxable accounts, high-income earners should consider tax-free investments like municipal bonds or investments that qualify as Qualified Dividend Income (QDI), which are taxed at a more favorable rate.
A solid financial plan takes into consideration the impacts of higher inflation on your financial house. If you feel insecure about your financial plan, consulting with a financial professional can help you navigate all financial markets. By adopting these strategies, households can better manage their finances and feel more secure during inflationary times.
Michael Berkhahn, CFP is Vice President of Graham Capital Wealth Management (offices in Tampa and Sarasota), an independent Registered Investment Advisor that specializes in providing investment management strategies for high net-worth families, foundations and pension plans. As a CERTIFIED FINANCIAL PLANNER practitioner, Berkhahn is part of an elite group of advisors who have completed the necessary training and requirements to hold the CFP designation and is a fiduciary committed to complying with its continuing education and ethics standards.
