The Impact of Inflation on Your Financial Plan
Inflation is the rate at which prices for goods and services increase over time. It's measured as a percentage change in the Consumer Price Index (CPI), which is a basket of goods and services that are commonly purchased by consumers.
Inflation can have a significant impact on your financial plan, especially if you're saving for retirement. When inflation is high, your money buys less than it did before. This means that you need to save more money in order to reach your financial goals.
How inflation can impact your financial plan
Inflation can impact your financial plan in a number of different ways. For example, it can:
Reduce the purchasing power of your money: When inflation is high, your money buys less than it did before. This means that you need to have more money in order to reach your financial goals and buy items.
Increase the cost of living: Inflation can also increase the cost of living, including the cost of food, housing, and healthcare. This can make it more difficult to meet your monthly expenses.
Reduce the value of your investments: Inflation can also reduce the value of your investments, such as stocks and bonds. This is because inflation erodes the purchasing power of your investment returns.
Strategies for protecting yourself against inflation:
There are a number of strategies that you can use to hedge against inflation. Some of these strategies include:
Investing in assets that tend to appreciate in value with inflation: Some assets, such as real estate and stocks tend to appreciate in value with inflation. This means that the value of these assets can keep pace with rising prices.
Investing in inflation-protected securities: Inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), are bonds that adjust their principal value for inflation. This means that the value of your investment will increase as inflation rises.
Investing in stocks of companies that are able to pass on higher costs to consumers: Companies that are able to pass on higher costs to consumers are more likely to be able to maintain their profits during periods of high inflation.
Inflation can erode the purchasing power of your money over time, so it's important to take steps to protect yourself. There are a number of strategies that you can use, such as investing in assets that tend to appreciate in value with inflation. If you're not sure where to start, talk to a financial advisor.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates. Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government. Outside tax sheltered accounts they subject to phantom tax.