What Should You Do About Inflation

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Are you stressed out about inflation? There’s no reason to worry. It’s better to focus on what you have control over and apply it to your situation. If changes need to be made, start making some good changes.

In this episode of the Finance for Physicians Podcast, Daniel Wrenne talks about what you should do about inflation, your concerns, and your assets.

Topics Discussed:

  • Inflation: What is it, why is it occurring, and how are recent events amplifying it?
  • How much should you have in your pocket versus in other places?
  • Financial Components: Consider income and assets when it comes to inflation
  • Short- vs. Long-Term Inflation: Ups and downs of volatile times and emotions
  • Steps to Take:
    • Solid Financial Plan: Pair up your goals and purpose for your resources
    • Cash: Maximize efficiency to be far less concerned/susceptible to inflation
  • Key Takeaway: Worry less about inflation to have more confidence in decisions


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Historical Inflation Rates: 1914-2022

For most U.S. workers, real wages have barely budged in decades

Stocks vs. Bonds: Differences in Risk and Return Make a Case for Both

Contact Finance for Physicians

Finance for Physicians

Full Episode Transcript:

Hey, everyone. I am looking forward to talking about a hot topic today. It seems like it keeps coming up in our conversations with people. It’s definitely in the news and the topic is inflation. We’re going to be talking about inflation. Really focus today would be on applying it to your situation, just some things to be thinking about.

The goal here is to not stress about it and make sure you’re making good decisions at the end of the day. We’re going to talk about that and hopefully, you’ll get some takeaways to put you at ease here or if changes need to be made, start making some good changes. We’ll jump into that now.

Okay, so we’re talking inflation. A few episodes back, I got into inflation and a little bit more of the why behind it and how it works. Definitely check that out. If you want to learn more about what’s going on, what is inflation, why is it occurring now, and how’s the recent events tying into that and amplifying it, so definitely check that out. I’ll link to it in the show notes.

Just a summary or quick review on that, basically, inflation is when prices, or the cost of goods and services increase over time. Whether it be like the gas prices are going up, over time, or the cost of bread and milk goes up. If you think about it, I’m sure you’ve seen those little books that they show the year you were born. I always remember seeing them in the Cracker Barrel, if you’re from the South, you hopefully know what that is.

They had to have these books. It shows 1983, that’s when I was born. You can buy the book and it shows what was going on in 1983. One of the things they have in there is the cost of bread and milk, cost for a movie ticket, and all those sorts of things. It’s always interesting to look at that because it’s surprisingly low. If you especially talk to your grandparents or anyone that’s older, they’re going to remember the day when things were very inexpensive.

That’s basically inflation over long periods of time. The end result of it is that your money, especially like a dollar in your pocket, is going to lose value. The government targets to keep inflation, ideally until 2.2%–3% ranges. Their target, which they’ve done a pretty good job at until recently. I think the pandemic, at least that’s what a lot of people say is. That set off this recent increase in inflation.

As of this recording, it’s closer to 8.5%, 12 months ending. That’s considered higher inflation. That’s about, I think that was as of April of 2022. Most people consider that high inflation. If you’re not careful, the concern here is that inflation is another element, like adding into the mix. If inflation was just consistently 2% exactly forever every year, that would simplify the world a little bit, and it would make it just one less thing to think about.

But when you add it into the mix, when things change, it’s just one additional factor to take into consideration that can potentially cause problems or mistakes. It can be an opportunity, as well. We’re going to talk through that a little bit more like how you can take some steps to make sure you’re doing what you need to do.

The big issue is things are getting more expensive. I think the question to ask is are you keeping pace? Are you being efficient? You have to have a dollar in your pocket, or I guess, these days as much but most people like to keep some cash—pure straight up currency in their pocket. But that is going to, for sure, lose value as inflation goes up and it’s going to increase. The higher inflation is, the faster it’s losing value as it’s sitting in your pocket.

I think the question is how much should you have in your pocket versus in other places and that sort of thing. So we’ll talk about that a little bit more. But first, I think the way I would look at it is there are two main components of your finances to think about and keep an eye on in regards to inflation. The first would be income, and the second would be assets.

Income is really a great inflation hedge. Historically, wages keep up with inflation, maybe even slightly outpace inflation. I’m talking for the masses. Maybe your pay has not quite gone up with inflation. But overall, historically, wages are a great inflation hedge and they keep pace very well with inflation, which is a very good thing, as long as you’re working and earning an income.

If you’re retired or you’re not currently working, that amplifies the effect of inflation on you. But if you’re working, I think the key takeaway here is just to make sure your compensation is keeping pace with inflation, that will allow you to at least maintain your ground. Assets get a little bit more complicated.

I guess, let’s start out with cash. It’s straightforward. It’s like a dollar in your pocket, like I was talking about, or just a checking account that pays nothing. If inflation is 10% per year, prices are getting higher by 10% a year. In that example, your cash in your pocket or in your checking account is essentially losing 10% of value per year.

On the other hand, if you have an investment, that’s a different type of asset. If you have an investment over that same 12 month period of time, it loses 10% of its value. Inflation is 10%. That compounds it. It’s really like a real loss of almost 20%, like 19%. Inflation has a way of eating up the value of your assets, especially if you’re not careful.

I think it’s good to look short-term, long-term and start to parse them out. Short-term, the numbers can get really scary to look at. Right now inflation is over 8%, like I mentioned. Cash is paying nothing and investments lately have been down. Even bonds have been down. Bond values have gone down lately. A lot of that is due to fears about inflation in the future. But either way, cash is paying nothing, investments have gone down lately. Inflation is over 8%.

That’s a very concerning peckish picture. Because if you look over the past 12 months, your checking account has lost 8% of value just by inflation eating it up. Your investment account maybe is down 8% percent before even incorporating inflation. It’s even down more than your cash accounts, but we have to remember that the short-term very easily can get all backwards and tons of emotion.

That’s when a lot of the errors happen, when people make big decisions based on short-term, volatile times and emotions kick in, especially when we’re talking about long-term oriented things. I’ll circle back to that in a second. Be careful with the short-term. Short-term periods of time get wack. That’s normal, like things get backwards and don’t make much sense. Because if we only looked at this 12 month period slice of time, it would not make much sense.

That’s very highly unlikely. Historically, this thing does not last for the long-term. You have to keep the long view in mind also when we look at all this stuff. It’s good to understand what’s going on, but you have to  remind yourself of what that long-term tends to historically revert to. Historically, the long-term reverts to basically some sort of sanity. It cuts out a lot of this emotional volatility that we’re seeing.

Long-term—I have a link to some long-term return reports and graphs and that kind of thing. But if we look at the long-term, long-term inflation tends to be pretty, pretty low. There are spikes in time. Right now it’s 8.5%, past 12 months. But the past multiple years, it’s been below 5%. I guess all the way back to the 1980s. The last time it was high, the last time it was in the range of what it is now was back in the early 80s, maybe 1982.

In January 1982 it’s 8.4% 12 months, and then 1981 had over 10% inflation. That was a spike. But if you look at long-term averages of inflation, it ends up flattening out to be relatively low. Some things you can compare it to if we’re looking long-term, might be stocks and bonds, or maybe cash or real estate or those sorts of things.

If we compare it to stocks, like I mentioned just a minute ago, if we’re talking short-term, it’s all over the place. short-term right now, it’s like inflation is higher than even the performance of stocks. you’re losing ground, but I’m talking about the long-term now. So let’s say, 10+ years, and this all linked to a chart that’s all the way back, I think this thing goes back to 1926. This visual I’ll link to, it’s going all the way back to 1926 before the Great Depression.

Stocks do exceptionally well. They outpace inflation dramatically. Over long periods of time, stocks can be volatile, but they dramatically outpace inflation. They’re historically a fantastic inflation hedge. They outpace inflation considerably. They perform very well, historically relative to inflation. Bonds even do very well. Their historical long-term performance is below stocks, especially longer term bonds historically perform very well relative to inflation. They tend to outpace inflation.

There are types of bonds that are designed to keep pace with inflation, like an I bond. I’ll talk a little bit about an I bond that’s been coming up lately. I bonds are designed to be exactly like inflation is. I bonds are basically equal to inflation. But historically, they’re at the bottom of the returns, they’re like neck and neck with inflation. They’re not doing as well as long-term bonds or stocks.

Real estate tends to do well, versus inflation, especially real estate as a business. Just owning real estate itself tends to be around inflation, but when you’re running it as a business, that can outperform inflation very well. Then cash, we’ve already talked about cash. Cash, historically, underperformed inflation quite a bit. In other words, cash is losing ground to inflation.

The interesting part about it is what are you doing about this? What are your concerns? How many of these different assets do you have? I think, before we get into specifics, I would think about some of these questions and ask them of yourself, or even before that, are you concerned about inflation? What is the underlying reason? Why are you worried about inflation? I think that’s a good question to ask yourself. Why might you be worried about inflation? Because maybe you have a very good mix of all those assets, and you’re basically doing the best you can.

In that case, there’s no reason to worry about this stuff. You’re doing all you can, and you’re good. But in a lot of other cases, maybe you’re not, or maybe you’re just not sure. Common concerns we see pop up, people will say something like I’m getting killed on my cash. My cash is not returning anything. I need to do something with it, maybe buy I bonds, or something else. Maybe people are saying my investments lately are getting killed, which they have been. Short-term, it’s a downturn. Maybe I need to make some changes on how I’m investing or not invest as much of my new cash into investments.

The news amps this all up, they tell you, you should be worried. We take that in a little bit, and it can amplify our fears. How do you address those concerns? Well, looking at cash, I think the big killer in inflationary times is cash. What can sometimes happen when there’s fear, people make changes towards the direction of safety. They like to flock to safety, and safer assets, in particular, like cash, or savings accounts, they long-term perform the worst relative to inflation but there’s this short-term pool towards them.

No matter what crazy markets are going on, but with inflation, people are concerned. Maybe people are worried about investing so that a lot of these problems where people lose ground tie in to having too much cash. Or the other big mistake is making changes to how you’re investing because of inflation changing.

I think the key to all of this is having a solid financial plan. This goes back to when you got to peel back the layers, ideally. A solid financial plan is where you’re pairing up your goals and the purpose for your resources together. In other words, you’re partnering your resources with or matching your resources with their given purpose and tying it into your goal. It helps you have better answers to some of those questions I was throwing out. It gives you some intent and some purpose.

Inflation concerns are normal. They come up but it gets really, really amped up when you don’t have a solid, clear financial plan. A good financial plan is going to help you, like I said, pair up those goals and purpose with the resources you have. First part of a good plan is, it’s going to help you map out a good short-term reserve plan. A lot of this stuff about inflation is external, factors you have zero control over.

It’s better to focus on what you have control over and make a plan based on your goals. In the short-term, there’s only so many things you are going to need. Short-term wise, typically, cash is a fantastic resource to pair up with a short-term goal. For these short-term plans, oftentimes, a common one is emergencies, like who knows what’s going to happen, or like a big major purchase in the next year. You can map out what all that short-term stuff is that you need to earmark cash for.

Ideally, you should have an exact cash number that is based on your plan. It is what it is. Cash is a fantastic place to put resources that are tied to those short-term reserves. Inflation is what it is. I mean, it’s going to happen, and it’s going to eat up the value of that, but it still doesn’t change the fact that you need to have it in cash.

Then long-term, a good financial plan is going to help you map the long-term goals and your long-term game plan with your resources as well. Investing is the most common vehicle or approach to help people maximize or make progress towards those long-term plans. It’s efficient. It works really well, like I was mentioning before it outpaces inflation considerably. Ideally, you have all that matched up where your dollars are doing its thing.

Your cash makes sense. You don’t have too much cash. You don’t have too little. Everything else is  earmarked for long-term stuff, and it’s invested in doing its thing. You should be maximizing efficiency and you’re going to be far less susceptible to inflation, or even concerns about inflation.

When you don’t have a plan, you’re going to be prone to worrying about all these scary news stories in the markets, and maybe you take action on that fear, or maybe you don’t take any action, which can also be potentially an error. The key, though, I think, is having a plan, your plan. I think a lot of these concerns that people are having are rooted in the fact that they have these dollars that are just not exactly accounted for, or they don’t have a clear purpose.

One of the common scenarios is maybe you have a lot of cash, maybe you feel like it’s a good amount, or maybe you’re just not sure, but you have a lot of cash. Right now you’re like, man, I’m getting killed with inflation. Common solution is I need to do something about it, and I’m going to buy something like I bond. I bonds are designed as the best way to match inflation. They’re a great tool for doing that.

Maybe you start buying I bonds with that cash. That is a better solution than just sitting in cash, because it does return more, especially right now. It’s going to be right with inflation. The problem is you had too much cash potentially or you’re not even sure. Maybe a large chunk of that cash should have been paired up with longer term goals. May have been better suited going into something totally different than either one of those things in the first place.

If it has a long-term use, you pair that up with something like a longer term investment, then it’s not even a consideration for I bonds. I think a lot of times, the problem is that there’s not an underlying plan. There’s not a purpose for the dollars. When there’s not a purpose for the dollars, it’s very scary to see them. It makes it almost scarier to see them losing value.

If you haven’t invested and it’s for your retirement, you’re like, yeah, no big deal. I mean, I’m not going to use the money in the short-term anyway. It’s for retirement. That’s a long time away. I get the markets going up and down, not a big deal. But when it’s in your cash accounts, and you feel this inflation eating it up, well, that really stinks. It just really gets to you.

I think the takeaway is if you don’t have a financial plan, this is a very good reason to have one. Make sure you’re pairing up those goals that you have with all these resources that you have available. I think that the end goal will be you’ll worry less about things like that, like inflation. You’ll have more confidence in the decisions that you’re making.

Alright, that’s enough inflation for today. Hopefully, we don’t have to talk about it much in the future. Hopefully, things revert back to this lower inflation phase but you never know.

I’m terrible at predicting the future. It’s best to assume we don’t really know what the future is and if it keeps continuing, we’ll keep talking about it. Make sure you’re navigating it as best as best you can. As always, good catching up with you and we’ll talk to you next time.