Inflation is a super hot topic facing our economy and all of our real lives right now. In today’s 2 Minute Q&A Tuesday, we’re going over inflation, your savings, and how this all affects you.
But first, let’s take a step back and remember all of the battles our world’s economy has faced. From covid forcing everyone to quarantine, factories closing down, and small businesses struggling to survive. The drastic low supplies for basic essentials like toilet paper, housing, and transportation. Our economy is still going through many ups and downs with our government pulling every trick in their hat. Now that all of these economic shocks have been felt all over the country. Where we’re now seeing them reflected in our economy through inflation.
What’s Inflation
To keep it short and sweet, inflation is when we’re seeing our money lose its purchasing power over time. The same goods and services we use to buy, are now costing us more money to buy. A quick example of this is the dollar menu at Mcdonald’s. A small bag of fries that use to cost $1 each, would now cost $2 or $3 dollars on the value menu. Resulting in us having to pay more for the same amount of food or having to deal with smaller portions.
What’s Transitory Inflation
It is a normal and healthy part of our economy to have some inflation that ranges usually around 2-3%. Depending on what’s going on in the world, some industries may see more inflation than others. In recent months we’ve seen a big jump in inflation ranging in the 4-5% percentile. Our government and economists are sympathizing with what’s currently going on in our economy due to covid. A lot of the inflation is being called transitory, meaning short-term.
What our government and economists hope for is that supply will catch up with demand naturally, so that prices can deflate in the pandemic-affected industries. But as things evolve, with wage increases, government spending, and covid still affecting our everyday lives. Our government is now considering that some industries are dealing with temporary inflation due to a lack of supplies and goods. But other industries can be seeing real inflation, due to all of the moving pieces of the economy.
What should I do with my Emergency Fund?
When it comes to our savings, specifically the emergency fund we have to remind ourselves what it’s actually for. One of the best ways to be prepared for whatever comes your way is by having an emergency fund. Our emergency fund savings aren’t here to help us hedge against inflation, build wealth, or fix all of our problems. But it is here as a financial safety net if you lose your job, get hospitalized, or have a family emergency. Even during times of inflation, pandemic, or anything else, knowing that you have it is mentally vital.
Even when inflation is knocking at the door, we don’t need to panic and invest our emergency fund. Instead, we need to evaluate how much we need for our emergency fund and find ways to preserve and increase our savings. Especially when life and emergencies are costing more and more money.
Short-Term vs Long-Term Effects
Dealing with inflation in the short term can be difficult when it comes to budgeting and saving money. But the reality is that inflation doesn’t show its true colors in the short term, it’s our future that gets affected the most. Later down the road, 10-20-30-40 years later when you realize that $1 Million dollars isn’t enough to retire. This is why financial advisors and financial educators preach to save more than what you think you need for these goals. Starting your retirement, kids’ college plans, and any other extremely long-term goals earlier than usual is the best. Even if inflation ranges dramatically high or low, you at least know that you have more time on your side to even things out.
Closing Thoughts
Even with everything that’s going on, we need to make sure we’re taking care of right now before we focus on the future. The cost of living is increasing, so we need to evaluate our budget, saving goals, and then our investment goals. When it comes to hedging inflation, make sure you’re investing in yourself, your skills, and your income potential. I would also recommend continuing to do your annual financial review to keep up with any changes needed for retirement and your other goals.
Resources
- Jerome Powell’s Jackson Hole Gamble Runs the Risk of Backfiring – Blooberg.com
- Warren Buffett says these businesses do the best during periods of high inflation – CNBC.com
- How inflation made many Americans’ pay raises disappear– USAToday.com
- Definition & Formula – Investopedia.com
