The consumer price index (CPI) for October slowed to 7.7%, lower than economists had predicted. However, with inflation in the US still running high and incessant warnings of a recession, many investors are worried about their savings.
In fact, 63% of middle-income earners and 43% of upper-income workers live paycheck to paycheck, according to a survey of 4,000 people by LendingTree.
Here it is five questions from Marketwatch ask your financial advisor, if you have one, or yourself – if you want to take stock of your portfolio, retirement savings, income and budget.
1.) What are my long-term and short-term financial plans?
The first thing you need to do to get your financial house is to take stock of your financial plan. How long will you be working? Are you looking to buy a home or move? Do you have family obligations, such as putting your child through college? Do you have a target retirement date?
Once you’ve solved your big financial questions, it’s important to tackle day-to-day money challenges, says Jennifer Kang, financial planner and founder of JWK Financial.
That means, pay off your debt, figure out your monthly budget, fine-tune your spending and think twice (or three times) about impulse purchases.
In fact, Kang said, there is no harm in meeting with the owner of the house about renting.
Build up an emergency savings, if you don’t already have one. Financial advisors usually say that it is important to save six months of salary, in case you quit, or are unable to work.
Also, in light of inflation and the looming recession, beware of for-profit debt settlement companies or other types of scams.
2.) How does inflation affect my savings?
By taking stock of your debt, including your mortgage and student loans, you can figure out how much inflation has removed from your budget. This is your “personal inflation rate,” as financial advisor Alex Borgardts of News Bloom Wealth of Kansas City, Mo., put it.
Becase inflation has eaten into everyone’s purchasing power, the only honest thing to do is to cut back spending, and spend more wisely, says Alonso Rodriguez Segarra of Advise Financial in Coral Gables, Florida.
Inflation also eats away at the value of your retirement savings, of course, but with stock and bond markets as volatile as they are, some retirees and near-retirees are too risky to increase market exposure.
Traditionally, the rule of thumb is to have a 60/40 portfolio, with 60% of your assets in equities and 40% in bonds. This is an important conversation to have in your financial planning, especially now.
3.) How diversified is my portfolio?
Directly related to the question of how inflation affects your budget and your savings is the critical question of how diversified your portfolio really is.
That means investing in more than just traditional stocks and bonds — looking at a variety of sectors and markets, and being exposed to not only domestic but international stocks.
Marketwatch columnist Philip van Doorn recently recommended 27 sharesincluding consumer staples and blue chips, which can give you a more diversified portfolio than the S&P 500.
4.) Do I have emergency savings?
Back to the question, originally raised in question #1: Do you have emergency savings?
Financial advisors widely cite a shocking figure from the Federal Reserve that only 40% of Americans can cover a $400 emergency.
As Americans spend more money during COVID since they are locked inside their homes and receive stimulus checks, that $1.7 trillion in excess savings in mid-2022 is slowly being wiped out by people putting everyday items — including groceries — on their credit cards.
With a personal savings rate of just 3.3% in the US, it’s never been more important for people to be aware of and save their savings, including emergency savings.
5.) Should I change course?
If you have any debt with a variable interest rate, you must pay that debt. That’s because interest rates will continue to rise, at the hands of the Federal Reserve, in a bid to tame inflation.
If you don’t qualify for President Biden’s student loan forgiveness program, or if it fails, for example, you’d be wise to pay off that debt, along with other personal loans and credit card debt.
For investors who are not approaching retirement and who can invest their 401 (k) and other retirement plans for the long term, it is best to wait out inflation, market volatility and recession storm, said Kang and William Thompson, a financial planner in. Valor Wealth Partners in Boston.
“Doing nothing is not a bad thing,” Kang said. “Just because something happened, doesn’t mean you have to change.”
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