Your Financial Health: Give Inflation a HAND
by Wendolyn T. Forbes, CFP®
As of this writing, the Federal Reserve has increased the federal funds target rate by 0.75 to curtail inflation. What does this mean? First, we need to understand inflation and the marketplace.
Inflation means that the dollar in your pocket today will buy less tomorrow. This shows up in your everyday life at the grocery store, the gas pump, restaurants, and other places when you buy goods and services. For example, you may have noticed (as I have) that a can of beans that used to cost $0.89 at the grocery store, now costs $1.29. What is behind the increase of $0.40? Picking, processing (i.e., cooking then canning), selling, packaging, shipping, and placing the can on the shelf: these transactions cost money. If those increase, the cost of the product increases to reflect those prices.
Next, we need to consider the marketplace. The value of an item is worth what you and others are willing to pay for it. This is often driven by supply and demand. If supply is scarce, demand may be high; if supply is high, demand may be low; and there are variations of situations in-between. During COVID, supplies of many items went down because of various circumstances (i.e., fewer employees to do the work; factory shutdowns, etc.) yet demand for those items may have increased. Over time, the supply of those items became scarce, the demand became high, and the cost of the items increased.
Going back to the example of the beans, if you choose to pay $1.29 for a can of beans, you are letting the marketplace know that the price is acceptable to you. However, if you—and others—decide that $1.29 is too much for a can of beans, choose to pass on it, and buy something else at the price point of $0.89, you are signaling to the marketplace that the price is unacceptable. After a period, if other consumers make the same choice, the supply will be high and the demand low, so the price will need to go down.
The Federal Reserve is increasing the federal funds target rate to make money more valuable to people. The federal funds target rate is the rate banks reference when issuing loans. This is important because if it costs more to borrow money, people may be less inclined to borrow it. You may see this in the mortgage marketplace. For example, people may be less inclined to borrow money to purchase a house if the interest rate is high.
Inflation is connected to everything in the marketplace, including investments. The investment marketplace has been volatile this year—moving up and down whenever, it seems, the Federal Reserve takes any action to curtail inflation. Does this mean you should act?
When it comes to investments and deciding whether to make any adjustments to your investments, you should give inflation the HAND. HAND is an acronym for Hold-up, Assess, Net worth, and Decide.
Hold-up. Before choosing to sell or buy investments during a period of market volatility, pause to consider why you want to act. Did you hear something in the news? Did a friend tell you about their situation and now you’re concerned about your own? Are you afraid you’re going to lose the money you’ve worked so hard to earn? Hold-up and breathe before you act.
Assess. Assess your financial situation. How is your budget doing? Do you have your emergency fund (3 to 6 months of expenses) funded? Have your financial goals changed (i.e., buying a house in 5 years, retirement in 20 years, etc.)? Have your circumstances changed (i.e., new baby, a move to another state, a new job, no job, etc.)?
Net worth. If you sell your investments right now and go to cash, how much money will you lose? Conversely, how much money will you gain? You see, if you make no change and choose to weather the storm of volatility—whether the volatility is positive or negative, you are not locking in losses or gains. When you track your investment account daily and see the ups and downs, you’re looking at paper gains and losses. The gains and losses only become real when you sell your securities. Also, depending on the type of account, you may face tax consequences. Do you know what the tax consequences are for you if you choose to sell your investments right now? How will selling at a loss help or hurt your future self? Do you know when to buy back into the market? Will you be paying a premium to buy securities after you’ve sold yours at a loss? Consider the long-term and short-term consequences of your actions.
Decide. Take the time to understand your concerns. Talk with a financial professional—whether that is your investment professional or accountant—and understand all your options: the pros and the cons. Then, decide the best course of action for you and stick to your decision knowing that you’ve considered all the options.
Inflation can be scary. Market volatility can be scary. Oftentimes, what scares us is the fear of the unknown. The way to combat that fear? Become informed. Talk with a financial professional who will help you understand your options and then give inflation a HAND.
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC, where she offers financial planning and investment management services for either a one-time or on-going cost. For more information about Wendolyn’s financial services practice, please visit her website at www.wtf-asn.com.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Originally published in the October 5, 2022 issue of Rumble by Smoky Mountain News, available here: https://smokymountainnews.com/lifestyle/rumble/item/34443-your-financial-health-give-inflation-a-hand