Inflation-Proof Your Financial Plan

Inflation-Proof Your Financial Plan

November 22, 2021

This week’s reader question is about preparing for rising prices: How can I make sure my financial plan and portfolio are inflation-ready? 

JonPaul McBride Financial Planner is pictured.Financial Planner JonPaul McBride had this to say:

Can you stress-test your financial plan and make your portfolio inflation proof? It’s an excellent question and one that is front of mind for us.

Federal Reserve Chair Jerome Powell believes inflation will let up later in 2022 once pandemic-related labor shortages and supply chain problems get sorted and the economy settles into a post-COVID normal. We’ll see how that hypothesis plays out. Until then, rising prices at the gas station and grocery store, not to mention monthly housing and heating bills, are leading to some serious sticker shock. What can you do to mitigate the sting?

First, you can revisit your financial plan or work with us to create one if you haven’t already done so. Drilling down, we can stress-test your budget by identifying the line items that leave you the most exposed in 2022: Heating costs, upcoming medical expenses, rent or mortgage obligations and weekly groceries. We can help you project how inflation might affect your personal balance sheet and ability to meet near-term financial goals.

Second, we highly recommend that you not make dramatic changes to the asset allocation in your portfolio without talking to your adviser. Yes, some research has shown that so-called value stocks, which tend to trade at a lower price relative to their fundamentals, have done well during inflationary periods. But everyone’s risk profile is different. The rule of thumb for most long-term investors? A well-diversified portfolio is the best hedge in any market environment.

Finally, if you are thinking about borrowing to buy a house or car, go with a fixed-rate loan. Wages (and often the value of your portfolio) tend to rise with inflation. So, while your fixed payments will remain the same, you can expect to earn more money over time while spending a smaller percentage of your paycheck as each year goes by.

While inflation is largely out of your control, your financial game plan is not. Let us know if we can help you think through minimizing the negative impacts of rising prices on your bottom line.

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