How to overcome inflation anxiety & sensibly adjust your financial plan

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A survey from Bankrate found 40% of US adults are feeling stressed or negatively affected in terms of their mental health as a result of money concerns. With prices rising at the fastest rate since the early 1980s, it’s not much of a surprise.

At the same time, the stock market is whiplashing on a seemingly daily basis, and interest rates are rising. Many Wall Street veterans describe the current mood as one dominated by “uncertainty.” Bankrate’s survey reported that of the four in ten Americans having money issues, most cited feeling stressed, anxious, and overwhelmed.

Control What You Can

Experts say that when the economy is going through a rough period such as this, it’s important to remember what’s outside your control. Acknowledging that inflation and the war abroad are the main drivers of the current economic environment can take some of the pressure off. Also, recognize that some of the inflationary pressures caused by supply chain issues and the COVID-19 crisis are historical events.

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Blame and shame are unproductive. Making a financial plan to match the current conditions is the better option.

Money Moves

One of the difficult aspects of inflation is how its impact can spread to many different sectors of the economy. That said, there are ways to put yourself in a better position. In light of rising prices, analysts say monthly budgets are more important than ever in ensuring spending habits keep pace with income. In terms of discretionary spending, that typically connects most to eating out and entertainment.

Economists and financial advisors will often point out that the market is cyclical. Some predict that inflation is at, or near, its peak. Others say that this week’s earnings reports from Walmart (WMT) and Target (TGT) signal that big-box retail is eating cost increases rather than passing higher prices on to consumers. There may not be much stress relief to be found in the phrase “grin and bear it,” but it seems appropriate during the current financial environment.


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3 money tips from experts who survived the inflation of the ’80s

 

Remember the 1980s? Blondie was at the top of the charts, the mystery of Luke Skywalker’s paternity was solved, and inflation was even worse than it is today.

The consumer price index, a measure of inflation, increased by an average of over 10% for two years straight in 1980 and 1981. Compare that to January, when the CPI had an increase of 7.5% year over year.

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Dennis Nolte, now a certified financial planner and vice president at Seacoast Investment Services, was just out of college in 1980 and remembers spending almost half of his $640 monthly pay on rent and waiting in line for gasoline after an energy crisis led to a nationwide oil shortage. That inflation and this inflation are not the same, he says.

Here’s how the inflation of 40 years ago is different from the inflation of today and what you can learn from people who have experienced both.

 

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The economy of the early 1980s was in many ways a tougher environment in which to experience inflation. Not only were prices higher, but the unemployment rate would reach 10%. While the pandemic continues to upend life, Nolte says, “People have money now. They have much more money to spend than they did, which is the whole reason for inflation now.”

 

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But unlike today, high interest rates in the 80s gave people a safe way to keep inflation from eroding the value of their cash through bonds and certificates of deposit.

“I was around back then and remember vividly posters in bank windows advertising 18% (certificates of deposit),” says Peter Palion, a certified financial planner and founder and president of Master Plan Advisory. “Today, you have 7.5% inflation, and a client just forwarded me a copy of an offer he got for a ‘high-yield savings account’ offering a promo rate of 0.5%.”

There are very few investments today that come close to offsetting the effect of inflation, Palion says. Certain government bonds specifically counteract inflation, but aside from that, your options are limited to riskier investments like stocks.

Here are three things you can learn from the 1980s inflation.

 

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While things looked bleak in 1981, 1982 brought one of the biggest bull markets in history. Over the five-year-period starting in August of that year, the S&P 500 more than tripled in value. Inflation went away, seemingly never to return.

 

 

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In other words, economic conditions can change quickly and drastically. That’s why it’s a good idea to build a portfolio with diverse investments. Some investments, like gold and real estate, will perform better in high inflation environments while underperforming during times of low inflation. Taken together, your holdings should perform steadily over the long haul, regardless of how economic conditions change — and they will.

 

 

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Just like in the ‘80s, higher interest rates are likely on the horizon. The Federal Reserve has signaled that it will raise rates multiple times in 2022. While that may help stop prices from rising to ’80s levels, borrowing may become more difficult as a result.

“Everything goes in cycles,” Palion says. “We had this high inflation back in the 80s, then it subsided, now we’re looking at inflation again. It’s all cyclical. It’s just a question of the length of the cycle.”

You can find a full list of references on Policygenius.

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originally appeared on 
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