Financial Commentary

Inflation erodes the purchasing power of your money.

As prices go up, the buying power of your money falls. A dollar in the future buys less than a dollar today. This phenomenon is called inflation. Currently at over 8%, inflation has reached its highest point in 40 years.

In my most recent article, I discuss how you can protect your financial plan from the ever-present risk of high sustained inflation. In short, there is no one-size-fits-all approach. Unlike what many financial advisors (read: salespeople) want you to believe, your best strategies rarely involve making significant changes to your investments.

Rather, it’s about maximizing income and minimizing expenses that typically keep pace with or outpace inflation over the long-term. Strategies to best protect your plan will thus rely on the specifics of your situation.

Previous Blog Articles

• What to Know about Active vs Passive Investing

• Is Real Estate a Good Investment

• The Cost of Children

• Can You Afford to Maintain Your Living Standard

• What to Know about Risk and Stock Market Volatility

• How to Create an Effective Estate Plan

What are TIPS and how do they adjust with inflation?

Treasury Inflation-Protected Securities (TIPS) are Treasury bonds that pay interest at a fixed rate based on a principal amount that adjusts with inflation. When inflation occurs the interest payment increases, as does the principal amount you receive at maturity. TIPS can be purchased individually or via a low-cost index fund like VTIP.

What are I-Bonds and are they a good investment?

I-Bonds are savings bonds issued by the Treasury that earn interest for 30 years based on a fixed rate plus inflation. Interest is tax-deferred and you can buy $10K per person per year. I-Bonds are just about the best bond you can buy, no matter what inflation is. Think of it like building an inflation-adjusted stream of retirement income (see my LinkedIn post).

How can I track progress to my financial plan?

You might track income and spending for the year and compare that to what was projected in your plan. This could be an end-of-year exercise, tabulated at a high-level, or an ongoing exercise using budgeting software. An easier alternative may be to compare end-of-year account balances to what was projected in your plan (see my how-to video).

Is Cryptocurrency an investment or speculation?

Investing is about acquiring assets that generate income or appreciation based on their fundamental value. Speculation is about acquiring assets in hopes of selling them for more in the near future, independent of their fundamental value. Warren Buffett says he wouldn’t pay $25 for all the Bitcoin in the world. Who is he going to sell it to?