This article was first published in 2022 and I have refreshed and updated it with the current news.
If you have been paying attention to the news in general lately, there is a lot of talk in what is happening in the economy and financial markets.
We are continuing to see high inflation numbers. We are hearing a lot more about tariffs and tariff wars than in recent memory. On an overall basis, things continue to be more expensive than we can ever recall.
If you are invested and have monies in your 401k plans, you are likely watching your balance decrease, or not grow even though you are contributing consistently.
There is a lot of news, and sometimes it sounds really bad.
What does this all mean, anyway?
With inflation numbers as high as they are, it means that the cost of a good that you once purchased, is now more expensive to buy that same product. It also means that if you are sitting on a lot of cash in your savings account, you have lost purchasing power. As an example, if you had $100 in your savings account at the beginning of 2021, inflation rates were close to 7% for the year, which means, by the end of the year, your $100 would only be able to by $93 worth of goods. Because of inflation, your dollar does not stretch as far.
With an increase in interest rates, it means that it is costing you more to borrow. If you have loans, that have interest rates that are not fixed, it will be more expensive to borrow. As an example, a few years ago, you would have been able to get a mortgage at 3+%, but based on today’s increased interest rates, if you were shopping for a new mortgage, the rate would be 6+%. The same applies to car loans and credit card debt.
On the converse of that, you might have seen an increases in the interest you receive for having your money in the bank, especially if you have been utilizing high yield saving accounts – but not commensurate with the interest you are paying on debt.
While the markets have been very volatile lately, based on history, the track record is that it will outperform bonds and cash over the long term. If your financial situation has not recently changed and your goals and plans have not changed, it is advisable to not make any drastic changes.
What actions can you take?
Do you have cash that is well above your emergency fund savings, but are also carrying debt? Consider paying off or paying down your debt.
If you have no debt, consider appropriate investment options for the cash above and beyond your emergency fund.
Review your overall financial circumstances. Do you need to make adjustments anywhere?
Continue contributing to your 401k and retirement plans.
Do not make any drastic moves in your investments because of the news.
If you’ve been waiting to invest in the stock market, because of the market decline, this presents an opportunity. Investing should be viewed as a long-term plan.
If you have questions on how to review your overall financial situation, and whether you should pay down debt, fully fund your emergency account or invest, please do not hesitate to reach out.