Inflation and the impact on financial planning
If you have been following the nightly news lately, chances are you have heard experts and economists discussing the economy’s inflation rate. While the headlines usually focus on higher prices at the gas pump and in the grocery store, there is less attention paid to how inflation can affect your efforts to save and invest. At, A.G. Campbell LLC, a wealth management firm with offices in Baltimore, MD and Naples, FL, we are often asked to explain the potential impact of inflation on one’s financial planning strategies.
What is inflation?
When the prices of goods and services increase over time, consumers can buy fewer of them with every dollar they have saved. Over time, inflation can reduce the value of your savings, because prices typically go up in the future. This is most noticeable with cash. For instance, if you saved $10,000 and kept it hidden underneath your bed for the next twenty years, you will still have $10,000 saved. In that time inflation will have risen and you will actually end up with a smaller purchasing power because of it.
Inflation and its impact on financial planning
To determine the impact of inflation on investments, you must look at the investment type. For investments with a set annual return, like regular bonds or bank certificates of deposit, inflation can hurt your performance. This is due to the eroding purchasing power of that fixed rate of interest because of inflation.
For stocks, inflation can have a mixed impact on your financial planning. When the economy is doing well, inflation is typically higher. Companies may be selling more, which could help their share price. However, companies will also pay more for wages and raw materials, which hurts their bottom line and share value. Whether inflation will help or hurt a stock depends on the performance of the company behind it. Furthermore, because of the inflationary impact on fixed income and cash, stocks usually are seen as a better place to invest in this environment.
Finally, there are some investments that are indexed for inflation risk. They earn more when inflation goes up, and less when inflation goes down.
Addressing Inflation through Financial Planning
Inflation is one of the main reasons why people don’t just put all of their money into the bank. Over time inflation can eat away at the value of their savings. That is why people put their money in potentially higher-growth investments like stocks or mutual funds because on average these investments can earn more per year than the inflation rate.
As mentioned above, consider inflation risk as you decide what kinds of investments to have in your portfolio. Fixed investments, like bonds or fixed annuities, can be adversely affected by inflation. To diversify, in addition to stocks, some investors choose to add gold or inflation-indexed investments to their portfolios.
Inflation is something you cannot ignore, and that is why it should be addressed through financial planning. By using “what-if” analyses that can project the impact of inflation on future cash flow, financial planning can show how to mitigate the impact of inflation on your savings and long-term investments.
How A.G. Campbell Advisory Can Help
A.G. Campbell Advisory, LLC is an independent investment advisory firm with offices in Baltimore, Maryland and Naples, Florida, offering individuals and institutions custom investment advice, financial planning and family office services. A.G. Campbell was founded in 2012 by veteran industry professionals to address the need for a high-quality firm where clients have access to the resources of a large firm, without the inflexibility and conflicts of interest inherent in a larger financial institution. The principal objective of A.G. Campbell is to advise our clients on how to grow and preserve their wealth for themselves and for their families. Our client’s best interests are of paramount importance and the foundation of our work.