Your first thought, spend it! But how? Is it the house project you and your spouse have been discussing for the last several months? Should you pay down your credit card balance? Go on a trip? Wait, you’re excited about the refund, but in retrospect you should have adjusted your allowances so that you didn’t give the government an interest free loan over the course of the last twelve months. With that said, should you fire your accountant? Well, it’s too late now. Take a moment, and think through the best use of this money? What are your short-term priorities? How do those priorities align or even conflict with other priorities that are further down the road? Should the refund have just one focus?
Let’s first sort through what we need to consider. Is this refund enough to actually complete the house project or will you actually have to put the remaining balance of the project on a credit card? Do you have your three to six months of savings in your emergency fund? What are the interest rates of your current credit cards? What is the current state of the market? Are you comfortable with market risk if you were to invest your refund? How secure is your current career? How variable is your current income? These are significant questions and require more diligence than, quickly hiring the contractor to install heated floors in that master bathroom. Give some intentional thought to this prior to your refund arriving in your bank account. Meet with a Certified Financial Planner to not only consult about what to do with your tax refund, but also your current planning situation and existing investment accounts and risk management plan.
Prior to the receipt of your tax refund, create a pie chart, sort through your most important priorities and time frames, then allocate accordingly, without heavily weighting one priority over the next. Make your refund go further. Start with savings, then, make a larger credit card payment than the monthly minimum if a balance exists, assuming the interest is in the teens. Tuck a portion into the stock market. If you anticipate needing or wanting the money prior to retirement, establish or contribute a portion of the refund to a non-retirement investment account. Only after taking these steps should you allocate funds to a home project. Why? You have now considered long-term planning first, then addressed short term priorities. Life happens, homes need upgrades, and travel is always an option. These plans will ALWAYS be available and present. Retirement and long-term planning will not happen, if you don’t plan now. Meet with a Certified Financial Planner to sort through what to do with your tax refund. Finally, discuss this with your CPA in preparation for next year’s taxes to sort through how you can limit the refund and have more cash available over the course of the year.
Recently, I followed up with a client after the client had been away on a family vacation for two weeks. Prior to that trip, the chaos of summer, work travel, and meetings had prevented the client from following up with me on a minor but impactful recommendation I had encouraged the client to consider in our last conversation. Before I had the opportunity to even say, “Hello,” the client apologized and communicated that I was owed a phone call. Yes, I had encouraged a decision knowing the impact would further strengthen the client’s financial situation, but in my diligence, I didn’t expect a phone call. The definition of diligence: careful and persistent work or effort. I love the simplicity of this definition and the use of the words persistent and effort. From knowing the client, I know the client is incredibly diligent in her own work and personal life. You see, when my client picked up this phone call, and the diligence of my follow up had just replaced the client’s call, eased the burden of the client having to call me back (amidst her intense work schedule), and ultimately resulted in the client making a best decision to improve the efficiency and effectiveness of her plan after re-clarifying the client’s priorities and current time frames.
An ongoing and sound financial plan requires an immense amount of diligence. If you are not ready to double down on this level of diligence on your own, why not hire a Decision Coach and Certified Financial PlannerTM professional to sprinkle the entirety of your plan with some diligence? Have you rebalanced your 401(k) lately? Have you increased your contribution percentage after your last raise? Did you update your life insurance planning after you moved into a new home after your second child was born? Are you planning on saving for that dream trip to Europe, or is that just going to magically happen in the next five years? What are the trading fees on your brokerage account? You have given thought to each of these questions. You have even discussed the answers with your spouse or close friends. Yet, you are busy and these action items are on the top of your priority list on a Tuesday. All of these questions require thoughtful planning with ongoing diligence, communication, and action. As soon as you settle into a plan with the right cash flow, life happens and you will need to adjust the game plan. My client didn’t forget to call me back. My client wanted me to call me back. Yet, my client didn’t call me back and didn’t make up her mind, until I called. Was I upset that I had to follow up several times? Was I frustrated my client seemed non-responsive? Of course not! It’s my career and joy as a Decision Coach. It’s part of my role as your financial planner to be diligent, to hold you accountable, to help you make qualitatively better decisions over time. Do I expect this to take a few follow up calls and three incredibly productive and ongoing quarterly progress checks between annual reviews? Of course! I love crafting a game plan for you. I love when you approach a financial decision and prior to making a decision, you reach out to me. I want your plan to be dialed in, so ultimately, you are living the life you want now, saving for the life you want in the future, as I provide the guard rails of diligence all along the way. A lot happens in a year and all of those little decisions have a significant impact over a long arch of time. Why I am so diligent with your financial plan? So, you don’t always have to be…don’t apologize, let’s just make the next best decision together and I’ll handle the follow up so we can one day celebrate together, not just because you are retiring, but because of the life you lived to get there.
As the cost of living rises, households worldwide feel the squeeze. Inflation impacts everything from groceries to housing to healthcare, and families struggle to make ends meet as they stretch their budgets to the limit.
Recent statistics show the inflation rate in the United States has risen to its highest level in over four decades. The Consumer Price Index (CPI) has increased by 7% over the past year alone. Inflation is a persistent increase in the prices of goods and services over time, leading to a decline in purchasing power of money. It affects the economy in many ways, including households, as it erodes their buying power, making it difficult to afford basic necessities.
A mature diverse couple shakes hands with a financial advisor.
How Is Inflation Impacting Households Today?
Inflation is affecting families significantly, with prices of goods and services rising rapidly. One area where inflation has a noticeable impact is the cost of groceries. According to the U.S. Department of Agriculture, food prices have increased by 6% in the past year.
Inflation is also impacting the cost of housing. According to the National Association of Home Builders, lumber has increased by more than 167% since April 2020, making building, renting or renovating homes much more expensive.
Other areas where inflation impacts households include transportation, healthcare and energy costs. With gas prices rising, transportation costs are increasing making it more expensive for families to commute to work or travel.
Healthcare costs are also rising, with medical services and prescription drugs becoming more expensive daily. Additionally, the cost of energy, including electricity and natural gas, is increasing impacting household budgets.
How We Got Here and Why?
The United States has experienced an increase in inflation in recent years, fueled by a combination of factors, including:
Supply chain disruptions: The COVID-19 pandemic caused disruptions in supply chains, leading to shortages of goods and raw materials and higher consumer prices.
Government stimulus: The US government has implemented several rounds of stimulus packages in response to the pandemic, flooding the economy with cash and contributing to inflation.
Labor shortages: The pandemic also caused labor shortages in many industries, which has led to increased wages for workers and higher prices for consumers.
Rising energy costs: The cost of energy has increased, with higher prices for gasoline and other commodities, which has increased the cost of goods and services.
Monetary policy:The Federal Reserve has kept interest rates low to stimulate economic growth, contributing to inflation by making it cheaper for consumers and businesses to borrow money.
These factors have all contributed to the current state of inflation in the US. However, inflation is complex and multifaceted; many other factors are also at play.
7 Tips to Help Navigate Inflation
Inflation can be a challenging economic environment for households to navigate. Here are tips from our team of advisors at Trilogy Financial that can help you manage inflationary pressures.
1. Calculate Your Inflation Rate
This measure provides a more accurate reflection of the inflation you are experiencing compared to the general inflation rate reported in the media.
A financial advisor can help calculate your personal inflation rate by analyzing your spending habits and identifying the goods and services that make up your personal consumption basket. This process can involve reviewing bank and credit card statements, examining household bills, and discussing significant lifestyle or spending habits changes to help you track the prices of these items over time and calculate your inflation rate.
2. Create a Cash Management Strategy
A cash management strategy will allow you to preserve your purchasing power and financial stability. A financial advisor can help you create a strategy that aligns with your financial goals and risk tolerance by:
Assessing your current financial situation,
Identifying your short-term and long-term cash needs, and
Recommending appropriate investments that balance liquidity, yield, and risk.
The strategy can involve diversifying cash holdings across different asset classes, using inflation-indexed bonds or money market funds, and considering alternative investments that offer potential inflation protection.
3. Discuss When and How to Use TIPS to Protect Against Inflation
Treasury Inflation-Protected Securities (TIPS) are a type of U.S. government bond indexed to inflation. As inflation rises, the principal and interest payments of TIPS adjust accordingly, providing investors with a hedge against inflation. A financial advisor may recommend TIPS if you want to protect your portfolio against inflationary pressures or maintain your purchasing power over the long term. It could involve assessing your risk tolerance and investment objectives and recommending an appropriate allocation to TIPS within a diversified portfolio.
4. Discuss Alternative ‘Inflation-Hedging' Assets
In addition to TIPS, assets such as commodities, real estate and stocks of companies with pricing power can provide inflation protection. A financial advisor can help you choose the right assets for your portfolio by assessing your investment objectives, risk tolerance and time horizon. As a result, they can recommend an appropriate allocation to inflation-hedging assets that balance return and risk, like commodity funds, real estate investment trusts (REITs) or sector ETFs offering exposure to companies with pricing power.
5. Strategize for How to Avoid ‘Tax Bracket Creep' as Income Rises
Tax bracket creep pushes an individual's income into a higher tax bracket, resulting in a higher tax bill. This move can erode the purchasing power of your income and reduce your savings.
A financial advisor can help you strategize on how to avoid tax bracket creep by considering tax-efficient investment vehicles, such as Roth IRAs, tax-loss harvesting and charitable donations.
6. Review Homeowners and Other Insurance Solutions to Avoid Under Coverage
As the value of assets, goods and services increase due to inflation, the cost of replacing them also rises. A financial advisor can help you review your insurance coverage and ensure they have inflation protection from risks.
Advisors can also educate you on the different types of insurance available and their benefits, such as umbrella insurance, which can provide additional liability coverage in case of a significant lawsuit or accident.
7. Reassess Long-Term Inflation Assumptions for Retirement Projections
Inflation can significantly impact retirement savings and planning because it reduces the purchasing power of money over time. Individuals will need to save more to maintain their living standards in retirement.
A financial advisor can help you reassess your long-term inflation assumptions for retirement projections by analyzing your current savings and investment strategies, projecting future inflation rates, and identifying potential gaps in your retirement plans.
From Us to You: Control Your Financial Future
As inflation continues to affect households, you should take control of your financial situation and work with a financial advisor to develop a plan aligning with your goals, risk tolerance and personal situation.
Trilogy Financial is a financial advisory firm dedicated to helping clients navigate the complex world of personal finance. We offer comprehensive services, including financial planning, investment management, and retirement planning.
If you are concerned about the impact of inflation on your finances, contact us today to schedule a consultation with one of our experienced advisors. We are here to help you take control of your financial situation and navigate through the challenges of inflation.
Female financial advisor meeting and discussing expert inflation protection tips with clients.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual 2. Investing involves risk, including possible loss of principal.
