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Welcome back to Invest in You: Ready. Set. Grow's supplemental Money 101 guide to financial wellness as we navigate the pandemic.
There has been a lot of talk about rising inflation — but what does it all mean for you, your wallet, and your retirement savings?
Inflation is essentially the rate of price increases over time, which decreases consumers' purchasing power. In November, consumer prices jumped 6.8% from 12 months ago, the fastest pace since 1982, according to the Labor Department. That means you are paying more for everything from gas for your car to the food you are putting on the table.
Today we'll look at what experts are saying about how long it may last, as well as how to make the adjustments in your budget and life to accommodate rising prices.
Thank you for already undertaking your journey to financial wellness. We hope these supplementary lessons help pave the way forward.
Sharon Epperson |
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INFLATION
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How and when it will end
The Federal Reserve had long said it expected inflation to be short-lived since it is being driven by Covid-19 supply chain and demand issues.
However, just last week, the central bank decided to battle inflation, announcing that it will accelerate the reduction of its monthly bond purchases. Then, the Fed will start raising interest rates, which is expected to begin in late winter or early spring. It typically raises interest rates to slow the economy and bring inflation down.
The latest CNBC Fed Survey, taken before the central bank's latest announcement, found that respondents, which include economists, strategists, and money managers, expect inflation to peak in February 2022 and then subside the rest of the year.
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Changes you can make to your budget
You'll have to plan your spending more than ever. Think about what you need right now and what can wait. Budget for those needs first.
See where else you can cut in your budget. By going over your credit card bills, you can assess where you are spending money. You may find recurring charges you forgot about and realize you no longer use certain apps or don't need multiple streaming services.
With gas prices up, you may want to consider cutting back on driving or carpooling.
While shopping, you can buy items in bulk, so you are not constantly spending as prices continue to climb. Looking at unit prices is a good way to comparison shop and find deals. A unit price is essentially the cost per unit of a particular product. For instance, canned goods may be priced per ounce and paper goods may be by sheet or feet.
You can also save by using coupons and browser extensions, like Rakuten and Honey, which automatically search for coupon codes and apply them at check out when online shopping.
Another way to save is by using any rewards you may have accrued from credit cards. Some offer cash back or retailers may offer discounts through their cards.
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How to adjust your retirement portfolio
If you are worried about your retirement, you are not alone. A quarter of Americans see rising inflation as the greatest risk to their retirement plans, a survey from Allianz Life Insurance Company of North America found.
Experts say that if you are under 50, the best thing to do is stay invested in stocks. That's because cash loses value as inflation rises. The stock market, on the other hand, helps defend against inflation.
However, have enough liquid savings, or cash, to cover about three to six months of living expenses in the event of an emergency, as well as money for any other planned expenditures, like the purchase of a home.
If you are closer to retirement, start moving a little more of your portfolio into safer assets, said Christine Benz, head of personal finance at Morningstar. Some of your fixed income can be in Treasury inflation-protected securities, which — as the name suggests — offer protection against inflation.
When in retirement, Benz suggests having about 20% of your bond portfolio in TIPS. Just remember, it's important to stay invested so you have income later in retirement. As always, check with your financial advisor for help with your specific needs.
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"Threading the needle right now is as tough as I have ever seen in my career. ... You [have] got to tread carefully... but you don't want to leave the market because the market is the greatest wealth creator of all time." — Jim Cramer
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The bottom line
Headlines about inflation can seem scary. By being aware and adjusting your budget and retirement savings, as needed, you can protect yourself.
On another note, I'm happy to announce that we now have a Spanish-language version of our Invest in You: Money 101 newsletter. Click here to register. The new series includes all eight initial newsletters, plus our bonus content, like this one we sent to you today. Please pass it along to anyone you think may like to sign up!
From all of us here at CNBC Invest in You, we hope you have a very happy holiday season!
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