Inflation isn’t a four-letter word, but it may as well be in terms of its impact on consumers. Defined as the rate at which the general level of prices for goods and services rises, inflation reflects consumers’ purchasing power.
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So, if inflation is at 5%, on average, prices have increased by 5% compared to the year before — meaning you essentially get less product for the same amount of money.
But high inflation does more than just dilute what you can get with your dollar. It also hits your savings. Sure, the amount you have in your account might go up or even stay the same, but its real value will still decrease over time if the interest it earns doesn’t outpace inflation. In a nutshell, your money buys you less over time, putting your financial goals further out of reach.
Financial advisors worth their salt work with clients to help protect their money against the slings and arrows of inflation. To learn more about the advice they’re giving clients now, GOBankingRates talked to a few financial professionals who shared insights about what you can do to help guard your money.
Stay in the Market
Evan Luongo, CFP, founder and lead advisor at NoDa Wealth Management knows that high inflation can make investors skittish. However, he wants you to know that one of the most essential ways to manage inflation risk is by staying invested — especially because cash underperforms inflation.
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“If you’re in the market, you’ve taken a big step forward in combatting inflation,” Luongo said. “Stocks and many bonds do a great job of outpacing inflation over the long run, which begs the question: What is your timeline?”
Speaking of timelines, Luongo regularly asks his clients what their long-term goals are so they can build effective protection measures.
“If unexpected inflation spikes over the next 1, 3, or 5 years, will it erode your purchasing power? If you need your investments to fund a goal in the short run, then maybe!” he said. “That’s when I advise clients to have some sort of inflation protection on their assets. That way they are protected.”
On the other hand, if his clients don’t need access to their investments in the near future, Luongo says there’s typically no need for inflation-protected bonds, since long-term investment returns historically outpace inflation.
Get Structured Life Insurance
According to Lucas Barcelo, founder of THRIVIN, one of the most underrated tools for fighting inflation is properly structured life insurance.
“I know people don’t always think of it that way, but cash value life insurance grows over time, gives tax-free access to cash when things get tight, and doesn’t even fluctuate with the market like traditional investments,” he said. “Plus, it adds a layer of certainty in a financial world that’s looking more and more uncertain every year.”
Barcelo wants people to understand that inflation will go through its ups and downs, and your financial plan should be built to endure both. “Our job is to create a plan that doesn’t just ride the wave but actually builds something solid underneath it.”
Rethink College Savings Strategies
As the director at CollegeWell, as well as an accredited financial counselor and certified college financial consultant, Jonathan Sparling is uniquely qualified to address parents’ concerns about their children’s college funds and inflation.
He said that recent market volatility has caused some families to see dips in their college savings accounts. For those seeking safer, less volatile options, he suggests reviewing the current asset allocation of their 529 savings plans.
“It might make sense to reallocate a portion of your savings to fixed income or cash, especially for families with a short runway before college,” he said. “Families should also look to states and the national Private College 529 that offer prepaid 529 options. Unlike traditional plans, prepaid plans are not exposed to market conditions, and the underlying value increases as tuition rates go up, essentially protecting against tuition inflation.”
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: Here’s How I Safeguard My Clients Against Inflation
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
