There’s a lot financial information available in the present and our team works to help customers like you to focus on what’s most important – the financial strategy you have in place. When you plan your finances to help you achieve the goals you have set, we pledge to keep following the plan.
The current events have brought up similar queries from our clients, and we decided to collect some of the answers in this post on our blog. This is where our whole group comprising CFP (r) experts will address the most frequently asked questions.
QUESTION 1: HOW ARE WE PREPARING FOR INFLATION?
The Director for Cash-Flow and Insurance Planning Regina Neenan
Let me give you an extremely brief timeline …
JUNE 10: FRIDAY’S CONSUMER PRICE INDEX (CPI) REPORT
Inflation has certainly become more ugly today. Since the last time I wrote about it back on December 20, 2021 the rate has been increasing — and even make headlines. It’s now at its 40-year highest level. The signs of the times are visible everywhere from the gas station to the shelves of grocery stores. If you’ve only recently noticed that dreaded shrinkflation isn’t the only one.
If you look back to my previous article and look at the November CPI reading was an 6.8 percentage increase over previous November’s prices. The current CPI Report revealed an 8.6 percent rise in May as compared to the May 2021. It was the most dramatic increase since 1981 plus an additional 2% gain over the same six-month time frame.
A negative side effect of higher costs for the things we use on a regular basis is an reduction in the individual savings rates. Since many salaries haven’t kept the pace of inflation, I’m seeing the outflows within the expense categories increase in cash-flow plan. Similar “stuff” is simply more expensive than it used to be. The ability to save less or that additional “fun money” in black on the bottom of the budget plan worksheet is evidence of the truth.
The question is What do we preparing ourselves for inflation? A simple, but sure to be a bit boring method of adapting and preparing for any possible increase in inflation is to focus on the savings. The truth is that these times are a reminder that you should pay yourself first, and eliminate “fun” purchases as necessary until inflation starts to stabilize and/or the next rise arrives at your doorstep. It is also possible to visit my website on conscious consumerism to learn money-saving tips!
Are you already feeling the pinch? Are you ready for the traditional tightening of the belt to limit the effects of any future inflation on your savings? Just time to check in on or make a plan to top off your emergency/opportunity fund? Do not hesitate to make time in my calendar to plan a cash flow update. The fact that inflation happens, doesn’t necessarily mean it should be difficult.
You won’t be the only one battling it out due to inflationary pressures. In fact, the Federal Reserve is also putting on a show.
JUNE 15: TODAY’S FEDERAL RESERVE MEETING
The Federal Reserve again increased the benchmark interest rate — just today, actually — in another effort to curb inflation. It was a huge one. The members of the Federal Open Market Committee had stated that they would likely get an half-point rate rise this morning. Then, inflation began to show its ugly face.
To control that inflation and manage the rising costs, in an effort to control that inflation, the Fed in an effort to control the rate of inflation, the Fed increased its Federal rates of interest by 0.75 percent. It’s the biggest rate increase in one day since 1994, which is nearly 30 years.
What does this mean for me and you? Most likely, it means higher savings rates, which are currently hovering just above the 1% mark and regaining some of their ancestors — and increased borrowing rates. The average national mortgage rate is currently at 6.6% and this could also signal a cooling down in the hot housing market.
While we work to get through the first signs of this bear market asked about I-Bonds and if they can be incorporated in your plan — particularly if the Federal Reserve isn’t able to handle a smooth landing in inflation.
QUESTION 2: SHOULD I INVEST IN I-BONDS?
The answer comes from the Director for Investment and Tax Planning, Jason Speciner
With the rate of inflation being so low for many years, I-Bonds have lost their significance since their introduction in 1998. Before November 2021, the highest rate that an inflation-indexed I-Bond ever offered was 5.7 percent, which was indexed annually in November 2005just around the time it was the time when money could be paying as high as 5percent.
But, as inflation has been gaining serious momentum in the last 18 months, IBonds have been the trending trend. Since cash yields next to nothing, I-Bonds offer a yield that is adjusted for the rise in inflation. In theory, this means that at the very least a small portion of your portfolio investment is keeping pace with the price of products and services. That’s great!
The problem is that I-Bonds can be … sort of awkward. They’re restricted in their purchase amount as well as source and liquidity. Because of these limitations the impact that I-Bonds can have on most investment portfolios is going to be quite limited.
In the past, a decade in the past, you could get up to $30,000 annually in I-Bonds. However, with the current limits of $10,000 per individual annually (plus the $5,000 limit if you specify the tax refund to be placed in bonds) that means a max I-Bond transaction is likely to generate between $1,000 and $1500 in the next twelve months. An interesting idea, certainly but not the portfolio-saving hedge that will ward off inflation we’d like it be at this point.
There’s nothing wrong with regularly putting 10,000 per year per person into I-Bonds. This is assuming that you’ve reached the point in the savings ladder in which taxable general-purpose investment is the best choice and you’re not planning to make use of the money for more than 12 months, and probably not for the entire 60-month period.
Also the $10,000 you spend on I-Bonds currently won’t provide enough protection against the general decline in market prices and the rising costs that are currently taking place. But a series of purchases of I-Bonds over the course that spans several years could in the end result in enough relative value to make a substantial impact on the value of your assets … if inflation resurfaces.
3 THINGS TO KNOW ABOUT I-BONDS
Thing 1 I-Bonds are not an option to cash in the short-term. In actual fact, you can’t exchange an I-Bond in any way for 12 months following the purchase. Following 12 months IBonds can be exchanged in the initial 60 months to avoid the interest of three months. If you’re buying I-Bonds for the first time in this year, be aware that I-Bonds are an intermediate-to-long-term investment and not a high yielding cash option that is liquid.
Second: The fixed interest rate for I-Bonds purchased today is zero percent. That’s right: nothing. It’s only the variable rate of inflation that’s offering any return (currently 9.62 percent annualized). If inflation slows (and it is likely to do so) it will go back the low of 0% (which occurred twice before in the past when the index had been negative). The prospect of owning a lot of I-Bonds in the present is great however, it could be a sign that you’ve waited several years with very minimal or no after-tax return. (not in a way, but this could be the reason you don’t own many I-Bonds now -the money you earned could have been better utilized elsewhere).
3. You are able to only buy I-Bonds through treasurydirect.gov and never in a tax-qualified account such as an 401(k) or an IRA. Unless something else changes, I-Bonds will likely always remain a distinct part of your portfolio of investments. This program of savings bonds was created to cater to “small” (relative to institutions pensions, government and other.) investors. Therefore, even in its current design, it’ll likely maintain the small nuances such as this.
Bonus feature is that there’s a hack that can let you buy additional than the limit of I-Bonds. It’s not the most practical option (and not something I would recommend) however it can technically work. In the way that it works is that when the savings bond gift program are implemented, you can store bonds that you purchase as gifts in a “to be distributed’ status. The idea is that you can purchase a number of these bonds today in unlimited amountsand earn them at an inflation-adjusted amount today and then give them to the beneficiary (a spouse or a child) in the near future. The gift you make in the future is counted against the beneficiary’s annual limit on purchases during the year in which they received it. It’s the most illiquid method to play the system, so be sure to tread cautiously, if you are able to do so.
QUESTION 3: ARE WE HEADED TOWARD A RECESSION?
Response from the Director of Estate and Financial Planning, Dan Andrews
Business and economic cycles follow a pattern. The St. Louis Federal Reserve shares a chart that shows the severity of recessions throughout the past.
You can clearly see that certain recessions last longer than others. Since 1990 in the 1990s, since 1990, the United States economy expanded a significantly greater than it contracted during the midst of recession. However, when recessions do happen, some businesses that were not prepared are struggling and could disappear due to declining or negative economic development.
Warren Buffett is credited with inventing a popular financial expression regarding people who aren’t prepared for the possibility of recessions.
If unprepared companies fail in recessions, a spiraling financial hardship could affect families of the employees of the businesses that failed sector, regions, and etc. A rise in unemployment and financial stress will follow, and should be temporary, as was the case with the recession that hit us in the last. For instance, according to the National Bureau of Economic Research, “The recession lasted two months [April and May of 2020], which makes it the shortest US recession on record.”
So, what is my response to clients who inquire, “Are we headed toward a recession?” My answer is always “Yes, I just don’t know when.”
As a customer you will be able to gain control by focusing on the financial goals that you have set in your budget. You can achieve many goals in times of economic prosperity and in bad ones by increasing the rate of savings by diversifying your investments in different financial markets, reducing the costs of investing, implementing your tax-efficient savings strategies or investment plans, as well as staying on track during hard times.
To assist clients during these challenging times, we suggest to come up with the following principles. These mantras can assist you to stay on track. If you’re having issues with the current fluctuations, here are a few examples of principles to guide you that can help:
“Think of the bigger picture and your long-term effects.”
“Be mindful of what you’re doing.”
“Be flexible. There are a variety of methods to achieve what you’re trying to accomplish .”
“Take a deep breath and enjoy life.”
“It’s only getting better.”
If the basic principles don’t work for you, continue making sure you’re increasing your savings in order that you don’t join the household “swimming naked.”
