More Thoughts About Inflation

In earlier posts, I discussed ten upsides of inflation and inflation-fighting strategies. Inflation continues to be in the news so below are some additional insights that I shared recently at a class about inflation-fighting strategies for older adults.

UPH is Real- Many people are feeling the effects of “unexpected price hikes” (UPH), a term coined in a T-Mobile ad. In informal polls of my students, LinkedIn connections, and Facebook friends, higher expenses that stood out to them were food (e.g., $5+ for 12 eggs!), services (e.g., lawn care, tax preparer, hair dresser), natural gas for home heating, electricity, and auto and homeowners insurance.

CPI Calculation- The consumer price index (CPI) that measures inflation is annualized over 12 months (e.g., January 2022 to January 2023) so there is no need for seasonal adjustments. A disadvantage of doing this, however, is that it emphasizes recent history rather than current events when there are abrupt changes. Right now, the CPI is averaging a higher past rate with a lower current rate. In 2021, it was the reverse (i.e., a lower past rate with a higher current rate).

The Rule of 72- For planning purposes, use The Rule of 72 to calculate how quickly prices, as well as investment account balances, will double. Simply divide 72 by an inflation rate to determine the number of years to double the price of an item. For example, at 6% inflation, prices will double every 12 years so a $40,000 new car now would cost approximately $80,000 in 2035. Good news: the historical inflation rate from 1926- 2021 has been only 2.9%.

Personal Inflation Rate- The official government CPI rate announced each month is not the same as people’s personal inflation rate which varies according to age, income, health status, and other variables. For example, young adults may spend more than older adults on gas (commuting to work) and housing (mortgage payments) while older adults might spend more on health care and travel and own a home that is mortgage-free. Personal CPI matters the most.

Impacts by Income Category- Inflation typically impacts lower earners the most because high prices consume a larger share of limited incomes. Recent data suggest, however, that middle-income earners were hit the hardest by inflation. Low-income households received government payments and large wage increases and high-income households had sufficient income and assets to absorb price hikes. Middle-income earners lost the most purchasing power.

Investment Impacts- Investors are understandably concerned about recent persistent inflation and poor market performance resulting in lower balances in retirement savings plans. Younger investors can take advantage of market downturns to buy stocks “on sale.” Retired investors who have enough money to pay living expenses from guaranteed income sources (e.g., pensions, Social Security, annuities) can “ride it out.” Retirees living off invested assets may want to cut expenses, reduce cash withdrawals, or tap cash assets to avoid selling stocks now.

Cash Asset Options- One of the positive outcomes from inflation is increased yields on cash assets resulting from seven rounds of Federal Reserve interest rate increases in 2022. With the Fed Funds Rate over 4%, there is no need to earn less than 1% on savings. Options to consider include Series I bonds (6.89% return through 4/30/23), fixed annuities, brokered CDs, U.S. Treasury bills, and online bank savings and money market accounts.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Ten Upsides of Inflation

The year 2022 was chock full of news about inflation, with a year-to year Consumer Price Index increase of 9.1% in June and a still-high 6.5% CPI at year-end. Not surprisingly, much of the news was negative; e.g., soaring prices for food, gas, utilities, cars, insurance, and more. What often gets lost in conversations and media reports about inflation are the ways that some people can benefit from it.

Below is a brief description of 10 inflation upsides:

COLAs- Anyone who receives an inflation-based COLA (cost of living adjustment) in their income benefits from inflation. This includes Social Security recipients, retirees with COLA-adjusted pensions, and workers with COLAs stipulated in their job or union contracts.

 

Inflation-Adjusted Bonds- This includes Treasury Inflation-Protected Securities (TIPS) and Series I bonds, both of which are designed to protect fixed-income investors against inflation. Through April 30, the return on Series I bonds is 6.89%.

 

Higher Wages- Many workers receive an income bump during inflationary periods. This pay increase may or may not cover all of their increased expenses, but it is better than no increase.

 

Increased Savings Contribution Limits- Maximum limits for employer retirement plans (e.g., 401(k)s) and IRAs are pegged to inflation. When inflation rises, workers can save more money.

 

Marginal Tax Brackets- Income ranges in the seven marginal tax brackets ranging from 10% to 37% are inflation-based. When bracket incomes rise, people may be taxed at lower tax rates.

 

Standard Deduction- The amount of income taxpayers can shelter from income taxes rises with inflation (e.g., for couples filing jointly, the standard deduction is $27,700 in 2023 vs. $25,900 in 2022).

 

Estate Tax Exemption- The amount of assets taxpayers can shelter from estate taxes rises with inflation (e.g., $12.92 million per individual in 2023 vs. $12.06 million in 2022).

 

Higher Bank Account Interest- Yields on bank accounts rose in 2022 along with interest rate hikes made to quell inflation. In January 2023, many online bank accounts are paying 3.30%+.

 

Impacts on Debtors- Debtors with fixed rate loans are untouched by interest rate hikes and can repay lenders with “cheaper dollars” (money worth less than when it was originally borrowed).

 

Investment Impacts- Certain investments often do well during an inflation surge as hedges. They include short-term bonds and bond funds, brokered CDs, real estate, and commodities. However, only make investments that you fully understand and are within your risk tolerance.

In summary, there are both winners and losers affected by inflation. Many people fall into both camps. Be sure to take advantage of as many positive aspects of inflation that you can. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Financial Improvement Strategies for a New Year

Another new year is underway, which provides an incentive to get “your financial act together.” Below are ten suggestions to improve your finances during the year ahead:

1. Pay Yourself First (PYF)- PYF treats savings with the same high priority as a mortgage, rent, or car loan payment. The easiest way to “pay yourself first” is to have savings deducted automatically from your paycheck through a 401(k) or other workplace savings plan.

2. Keep Good Financial Records- A paper or digital file folder for each stock or mutual fund you own is useful. Save annual summary statements to help calculate a capital gain or loss when shares are sold. Reconcile and file bank checking account statements monthly.

3. Insure For Large Financial Risks- Insurance coverage should be reviewed periodically. Be sure to cover “big ticket” risks, such as liability, disability, loss of a breadwinner’s income, and destruction of your home, that would wipe out your savings without insurance coverage.

4. Invest For Long Term Growth- History indicates a higher return in stocks (or growth mutual funds that invest in stocks) over time than any other asset class (e.g., bonds, cash).  For a “low maintenance” approach to stock investing, consider a “total stock market” index fund that tracks the Wilshire 5000, a broad-based barometer of the U.S. stock market performance

5. Live Below Your Means- This means spending less than you earn and using the difference to reduce debt and/or save for future financial goals. Try tracking your spending for a month to see where your money goes. Then identify expenses that can be painlessly reduced.

6. Borrow Smart- Comparing at least three lenders before applying for a loan or credit card is wise. Compare the annual percentage rate, fees (e.g., late fee), and other features.  Transfer existing credit balances to a lower-rate creditor or ask an existing creditor for a reduced rate. 

7. Set Specific Financial Goals- SMART financial goals state what you want, when you want it, and how much it costs (e.g., a new car in 2028 with a $10,000 cash down payment).  Once a goal is specific, divide the time frame into the dollar amount to see what you need to save.

8. Calculate Your Retirement Savings- Retirement calculations are tricky because you need to account for factors such as life expectancy, anticipated sources of income (e.g., Social Security), and the future value of existing savings (e.g., IRAs).  Two helpful resources are Rutgers Cooperative Extension fact sheet #431 (“How Much Do I Need to Save for Retirement?”) and the “Ballpark Estimate” calculator on the Web site www.asec.org.

9. Get Financially Educated-Some suggested learning methods include adult education courses, books, magazines, newspapers, blogs, podcasts, websites, and financial advisors such as a certified financial planner.

10. Think Positively- When facing financial, as well as health, challenges, having a positive attitude is important.  People who think positive generally experience greater success than “negative naysayers” because they believe there’s a connection between what they do today and what will happen in the future.  In other words, “if it is to be, it’s up to me.” 

Today is the first day of the rest of your financial life.  Make the most of it and have a healthy, wealthy, and happy New Year.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

2022 Personal Finance Year in Review

Last month, I presented my eighth annual (2022) Personal Finance Year in Review webinar for OneOp. Below are dozens of important events and trends from the past year:

High Inflation- The consumer price index (CPI) started out the year at a 12-month percentage change of 7.5% in January 2022, reached a year-to-year high of 9.1% in June 2022, and stood at 7.1% in November. There was a four-decade high in core inflation that excludes food and energy and inflation eclipsed strong wage gains for many workers.

Inflation Impacts- Higher prices affected the following household expenses: food, restaurant meals, apartment rents, air fares, child-rearing expenses, and utility bills. A majority of Americans (i.e., many Gen Xers and younger ages) experienced high, sustained inflation for the first time in their adult lives.

Interest Rates- The Federal Reserve raised interest rates seven times in 2022 through December, including four rate hikes of 0.75%. It is trying to raise interest rates to cool inflation without causing a recession. Impacts were felt in mortgage interest rates, variable rate credit, and bank savings accounts.

Savings Rates- The U.S. savings rate, which rose to a record 33.8% in April 2020, started the year at 4.7% in January 2022 and declined to 2.4% in November 2022. The average interest rate paid on savings accounts was 0.18% in November, but some online bank money market accounts paid 3% to 3.25%.

Housing- Mortgage interest rates soared past 7% for the first time in more than two decades in October 2022 vs. 3.05% a year earlier. Many home buyers backed out of deals or coped with lock-in fees and higher down payments. Rents increased sharply in the first half of 2022 before gradually subsiding.

Taxes- The average income tax refund in 2022 was $3,039, but some families with advanced child tax credits faced tax payments. Some states held sales tax holidays in response to high inflation. The IRS also issued new guidance for some inherited IRAs.

Credit- 2022 saw the post-pandemic return of unsecured personal loans, rising variable rate interest, and a $30 maximum first-time late fee on credit cards. Medical debt in collections that was subsequently repaid was removed from credit reports and Equifax reported a three-week credit scoring glitch.

Student Loans- Many Public Service Loan Forgiveness (PSLF) qualifying payment rules were suspended through October 31 and the final extension of the pause in student loan payments is sometime in 2023, depending on the timing of the resolution of the court-challenged student loan forgiveness plan that is undecided as of January 2023.

Cars- Monthly car payments crossed a record $700 and the average cost of a new vehicle in November 2022 was $48,281. New cars were in short supply and used car prices exceeded their original value on some models before starting to ease. The average age of vehicles rose to a record 12.2 years in 2022.

Shopping- Buy Now, Pay Later (BNPL) increased in use, both for travel and shopping. 2022 also saw car and electronics supply (and prices) affected by a continued shortage of computer chips, a baby formula shortage, and many consumers returning to pre-pandemic shopping, travel, and entertainment habits.

Insurance- Auto insurance premiums increased due to increased cost of repairs (labor), replacement parts, and car rentals and life insurance sales increased amid COVID fears. Homeowners insurance premiums increased by 12.1% on average and renters insurance premiums averaged $18 per month.

Investing- The stock market faced extreme volatility throughout 2022 and entered bear market territory in September. A bright spot for investors was the 9.62% return on inflation adjusted I bonds from 5/1/22 to 10/31/22, then decreasing to 6.89%. Other popular cash asset havens at year-end were fixed-rate annuities, brokered CDs, and Treasury bills.

For more information about 2022 personal finance events, review this reference list.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.