More and more on the news, we’re hearing and seeing more talk about inflation. All about how inflation is hurting the economy, how it’s going to slow us down, how it’s out of control, how it’s soon to be out of control, there’s a lot of noise out there. On this blog I often talk about tuning out the noise, and how I think it’s best to just focus on your slow and steady growth. I do think it’s important to take a pause from that and address what is appearing more and more to be the 800 lb. gorilla in the room. I do think that inflation can be dangerous if not reigned back in, and although I don’t want to panic or make you overly nervous, I do think it’s important to be more aware about it.

What it is

Inflation is the general rise in prices in an economy over a period of time. Growing up I remember hearing stories from parents or grandparents talking about how back in the day a car cost $X, a house cost $Y or a bottle of Coca-Cola cost $Z. Those numbers were much less than they were when I was hearing those stories, and even more so less than we have today. We live in a capitalistic economy, where the underpinnings of the economy are based on supply and demand, and where profit-generating transactions are always taking place. As such, over time we often see the slow uptick in prices. It’s a naturally occurring thing and as profits continue to accumulate and grow, prices of goods and services slowly rise.

Slow and steady inflation is actually considered a good thing, as it’s a sign of a healthy and growing economy. The Federal Reserve, which is an independent entity that controls the money supply here in the US has two goals – 1) maintaining slow but steady inflation and 2) keeping unemployment low. So, when you hear of inflation in the news, don’t be alarmed right away, a little bit is good. The opposite of inflation is deflation and it’s often a sign of a troubled economy, where things aren’t going so hot and businesses are slowing down.

Where we get into trouble is when inflation is too high – i.e. over 2%. 1-2% is considered healthy, but anything over isn’t a great sign – it’s a sign of an economy out of balance.

Why too much of it is bad

Think of the economy as a seesaw, it’s important to have good balance throughout. When things start getting a little too hot, i.e. moving too fast or growing too much, the economy gets out of balance. High inflation means higher prices, and higher prices will start to wreck people’s budgets and economic livelihood. What used to cost $1.00 will now cost $1.04, $1.05, or $1.06 depending on the 4-6% inflation that we’re starting to see here in the US. Did you get a 4-6% raise? Maybe, maybe not. For many of us, we run a pretty tight budget as is, and suddenly if our expenses go up by a few percentage points, we may have to start making cuts or making tough choices. Too much inflation becomes a vicious cycle; people fear rising prices so they buy more today, which increases economic growth even more which can lead to more inflation tomorrow.

Have you felt it?

I can say that I’ve personally felt inflation. Inflation can be hard to define, hard to conceptualize, but when you feel it, you certainly can point your finger to it. I’ve noticed it personally as I go out to eat, buy groceries, and fill my car up at the gas station. I would find myself taken a bit aback when I saw the bill and it was time to pay. I was thinking to myself that I know it’s been about a year or so that I’d been out and about (due to COVID and me staying in more), but geeze, I didn’t remember things being that pricey prior.

Think about it in your own life – start paying more attention to how much things cost and see if it feels like it’s more expensive than it used to be.

What to do about it

Now that perhaps you have a better understanding of inflation, the obvious question is…what should we do about it? Unfortunately there’s no silver bullet, or automatic fix to solve inflation or to make it better in your own life. It’s a bit like a cruise ship, once that thing is doing in a direction, it takes some time and energy to stop it. However, there are 3 things that I’m personally keeping in mind during this inflationary period.

Asset heavy, cash light

Before I jump into the things I’m personally doing, I think it is good to share what the textbooks would say about inflation. As inflation is the overall rise in prices, most good/services/assets will rise. That means we can expect to see things like houses and stocks to increase as well. Therefore, during inflation, it’s wise to be invested in more assets, i.e. things that will rise in value along with the rest of the goods/services. If you own a house, consider if it’s risen in value over the past year. Check out your 401(k) balance and see it’s return over the past year. It’s likely gone up considerably, while your cash has lost 5% of it’s value due to inflation. During inflation, things like debt (smart debt, not dumb debt!) and assets are considered better places to park your money.

However, this may feel risky if there’s a crash coming, and I personally feel torn between wanting to go very very low on cash and heavy on investments and at the same time worried the stock market is over-inflated and that we’re do for a fall in prices and want to be more in cash. However thanks to point #2 that I’ll make in the next section, I know what to do!

Keep growing

Essentially inflation means that one part of the economy is getting ahead of the other, and in this case, prices are rising faster than perhaps wages, or faster than the interest paid in your savings account. Inflation is currently sitting at about 5%, which means it now costs $1.05 to buy that same good or service. Is everything else in your life growing at 5%? Did your employer recently give you a 5% raise at work? Did your bank adjust the interest rate from 0.4% (or lower, that’s what my high-yield savings account is paying) to 5%? Probably no, which is a very sobering realization that you’re falling behind.

One of the mantras of this site is that your money should always be working hard for you. If my money is just going to sit in a savings account, it should be earning the most interest that it safely can. If you have a bunch of cash sitting around, some of it should be in a low-cost index fund. Your money ‘safely’ under a mattress does you no good and in fact will lose value over time!

The same goes for you professionally. It’s important to continue working on your own professional development. Take trainings at work, read articles online (not just the news lol), take courses, network, always try to grow and develop. By doing so you will remain a competitive asset and when it comes time for raises or promotions, you’ll be considered. The alternative is akin to putting your money under the mattress. Sure you can coast and take it easy, but over time you’ll fall behind and lose value! Invest in yourself!

Stay the course

One of the other big mantras on this site is about tuning out the noise, and working more on staying the course. No one has a crystal ball in terms of what will happen in the economy or the stock market, and if you listen too much to the noise, I’m convinced you’d do nothing but worry all the time. The market can be very volatile on a day in, day out basis but if you zoom out a bit, you’ll see that we’re on an upward trend, meaning that on average, stocks are going up.

I’m convinced that the best course of action for me is to stay the course. I’m going to keep putting 15% into my retirement account, 15% into my employee stock purchase program (ESPP), and then general saving beyond that. I’m going to keep buying low-cost index funds and to keep about 95% of my investments in index funds instead of individual stocks.

It’s impossible to predict that short-term but I’m confident that over a longer period of time that my investments will rise, otherwise I’m sure we’ll have much bigger problems on our hands and the balance of my 401(k) will be the last of my worries.

Tighten the budget

Inflation can be a scary time for us as consumers. It kind of sucks seeing gas prices rise, seeing our grocery bill grow despite buying the same amount, and seeing the menu at a restaurant. It’s never a bad idea to tighten down on the budget, and control spending where you can. Hopefully if you’re a long-time reader of the site you’ll be good at saying ‘no’ to purchases outside of your budget, and it may be time to start saying no more often. Unfortunately your employer might not be raising your wage as much as the price of groceries is going up, and you may need to control your spending a bit more in order to keep up! There’s no shame in cutting back on spending, a strong budget is a flexible one, one that will adapt and keep up to help you achieve your financial goals!

Summary

It certainly feels like we’re living in an inflationary period, and for many young professionals, this is unchartered territory for us. Work on investing in both yourself and your money, stick to your guiding financial principals and don’t be afraid to adjust your spending to keep up!