By Barbara O’Neill, Ph.D., CFP®, firstname.lastname@example.org
In colloquial terms, a “hack” is a work-around solution or strategy to overcome an obstacle or challenge of some sort. People often talk about hacks for time management, work-related activities, and home maintenance.
Something that needs hacks right now is inflation, which is a general rise in prices and decrease in purchasing power of money. According to the U.S. Bureau of Labor Statistics (BLS), the annual U.S. inflation rate was 5.0% for the 12 months ending in May 2021. The biggest contributor to recent price increases was energy.
Inflationary pressures are evident in costs of food, gas, housing, cars, travel, and more. Below are eight hacks that Personal Financial Managers (PFMs) can suggest to clients to cope with inflation-related price increases:
- Tweak Household Cash Flow– Tasks for clients are to identify specific ways to increase income and/or reduce expenses and to list action steps in priority order. The aim is to “take back” what inflation has taken away. For example, earning and/or saving $150 per month if food, gas, and housing now cost $150 more.
- Make Prudent Substitutions– An example is buying store-brand foods instead of national brands that have announced price increases (e.g., cereals, dairy products, canned meats, and peanut butter). In addition, thrift shops can be a great place to find deals on clothing, housewares, books, furniture, electronics, and more.
- Time Shift- Pandemic-related “pent-up demand,” as well as supply chain breakdowns and labor shortages, is exacerbating “premium” pricing and inflationary pressures. Anything that military families can do to “off peak” their activities will likely help. For example, attending events or traveling at less crowded times.
- Change Habits– Encourage habits that save money including consolidating errands to save gas on road trips, turning off unused lights and electronics, avoiding shopping due to boredom, and stopping unnecessary subscriptions (e.g., magazines and streaming services) and automated expenses (e.g., gyms).
- Wait It Out– Many home buyers are engaging in bidding wars and paying more than listing prices on houses and some new car buyers are paying more than the MSRP (sticker price). It may be prudent to simply not buy a house or new or used car right now while prices are rising rapidly. In other words, wait inflation out for a period of time and use that time to continue to save money and/or reduce debt.
- Take Advantage of Inflation– Inflation can be a friend when it increases household income. Clients should know that military retired pay is adjusted for inflation annually, effective December 1st. The cost-of-living-adjustment (COLA) is determined by the percentage increase, if any, between the average current year 3rd quarter Consumer Price Index (CPI) and the 3rd quarter CPI of the prior year. If the average CPI should decrease, the COLA will be zero (i.e., no change). Social Security is also indexed annually for inflation.
- Consider I Bonds and TIPS- “I” bonds are an inflation-adjusted U.S. saving bond that protects savings from inflation for up to 30 years and currently pay 3.54%, about 177 times the 0.02% average return on money market funds. Each May and November, the U.S. Treasury Department announces a composite rate of return that applies to all I Bonds issued during the following six month period. Twice a year- on the anniversary and semi-annual anniversary of a bond’s issue date- an investor’s I Bond adjusts for inflation. Another inflation-protected investment to consider is Treasury Inflation-Protected Securities (TIPS).
- Ladder and Hedge– Changes in market interest rates can be hedged with a “ladder” of bonds or certificates of deposit (CDs). This is where a sum of money is divided into a sequence of timed purchases with different maturity dates. If interest rates rise, securities that mature can be reinvested at higher interest rates. Value stocks, precious metals, and mining stocks and stock funds also tend to do well in inflationary periods.
To help clients understand the wealth-eroding effects of inflation, review the BLS CPI Inflation Calculator.