Inflation has been front and center in the financial media for weeks, and it’s not hard to see why.
It has reached record levels—up to 7.5% over the past twelve months—and that number is likely to get doctors sitting up straight in their seats.
Inflation concerns are buzzing from headline to headline—but how could these rising numbers actually affect your money?
Let’s find out.
What Is Inflation?
Often, things become less “scary” the more you know about them; the same can be said for your money. So, let’s work to make inflation more approachable.
Inflation marks a loss of consumer purchasing power, a.k.a things cost more. Where you could buy a cup of black coffee for .25 cents in 1970, you’ll shell out over $2 on average in 2022.
Unfortunately, coffee lovers could soon see the price of their cup of hot joe reach record levels. The global shortage of arabica beans is causing prices to skyrocket—beans are up 50%—even Starbucks raised their prices at the tail end of 2021 and again in January 2022.
That’s just one example of inflation at work, and we’re living through one of the highest inflationary periods in decades. The last time consumer prices were this high was when people were jamming to rock tunes in 1982.
In moderation, inflation isn’t necessarily a bad thing. In fact, a little inflation can go a long way to shore up an economy. Generally, inflation marks economic growth—rising wages, lower unemployment, as well as increasing production, consumption, and activity. And the positive economic activity was beneficial for the U.S in the wake of the coronavirus pandemic.
But did the economy bounce back too quickly?
Three Reasons Inflation Is So High Right Now
While experts often deem roughly 1-2% inflation as “good or normal,” these higher levels could signal a problem.
Why is inflation so out of balance?
- Supply and demand. There’s been a significant mismatch between supply and demand during the pandemic. While demand plummeted at the start of the pandemic with job loss and other restrictions, it picked back up with the influx of stimulus checks and other governmental economic relief efforts. Suddenly, people had purchasing power again, but the supply couldn’t keep up with the demand, causing backlogs.
- Labor shortage. While demand stays sky-high, there simply aren’t enough people to fill available roles; that’s one reason why your favorite restaurant may have less capacity or be open fewer hours.
- Higher production costs. COVID restrictions, labor shortages, and material shortages bumped production costs through the roof, and elevated production costs often result in a higher final consumer cost.
The good news is that experts believe that this high inflationary environment is a season that will pass, just maybe not as quickly as we’d all like.
Inflation hits three critical areas of your finances: spending, saving, and investing. Here’s a bit more about each area and how we could help you.
Inflation Makes Everything More Expensive
Rising inflation levels bring with it higher costs of goods and services.
Nothing is immune—everything from everyday essentials like groceries and clothes to products like housing materials to utilities like energy to experiences like airfare, hotels, and transportation are increasing.
All of this means that the cost of living is increasing, so your grocery, energy, and travel bills may be a bit higher than typical. What can you do about it?
Take a look at your cash flow plan to see if you need to make any intentional adjustments. For example, with construction costs so high, you may want to push your kitchen remodel out a year or so.
We can help you evaluate your cash flow plan and determine if you need to make any shifts.
It Could Help Inform How Much Cash To Keep On Hand
Given the significant market swings over the past two years, many physicians have demonstrated caution regarding holding cash versus investing.
But too much cash isn’t always a good thing for your finances.
The current average savings rates, even on high-yield savings accounts, are dismal, 0.06%, and inflation could make that money worth less over time. So, how much cash should you keep? While the answer is different for everyone, you can ask yourself a couple of questions.
- What’s the state of your emergency fund?
- Do you have accessible funds for more routine expenses, like home maintenance, property taxes, and more?
- Do you have enough cash to pay the bills?
You work so hard, and your money should work hard too! Keeping too much cash sitting around in a savings account (outside of emergency money and necessary cash) doesn’t allow it to work as hard as possible.
Once you’re confident you have the cash cushion you need, turn your attention to investing the rest. Investing in a comprehensive, diversified portfolio is an excellent way to help you reach your goals.
Inflation Highlights The Power of Long-term Investing
Should inflation impact the way you invest your money?
Maybe; it just depends on what works best for your risk tolerance, time horizon, cash flow needs, goals, and more.
In general, long-term investing sets you up for the best chance to reach your goals. That’s because the earlier you invest, the more time you give your money to take advantage of compounding interest.
Let’s look at an example using a compound interest calculator.
Say you invest $1,000 in a brokerage account and then contribute $100 monthly. In 10 years, that $1,000 initial investment could grow to over $17,500.
Even when times are tough, staying invested brings consistency to your strategy and could help you earn more in the long run. Data from Dimensional Fund Advisors found that even missing just the top five days in the market can significantly impact your net returns, up to a 37% loss in their example.
Creating and sticking with a long-term investment strategy puts you in the best position to outlast inflation’s impacts. But just because you’re staying invested doesn’t mean your investment strategy must remain static. We can help you make intentional changes that reflect what’s best for your present and future. For example, you may want to shift some of your fixed-income to private credit or other private investing ventures.
Private investing may not be suitable for every physician, but if it’s something you’re interested in, we can help you explore your options.