Cents & Sensibility — Inflation and volatility

Beth Peabody

Last month’s column discussed the importance of defining “career” and “reputation” as a means to gain greater financial security. Action items included discussing specific career plans with your current employer and improving your reputation by expanding relationships with co-workers.

While Cents & Sensibility strives to provide sound, timeless advice, this month’s column will focus on more immediate and timely recommendations based upon current events:

  • Most Americans dread the deadline to file their federal tax returns for the 2021 tax year and most will do so by April 18. For many, there is still time to trim your tax bill by making deposits to a traditional IRA. For others, such contributions may not be tax-deductible, but a traditional IRA or Roth IRA bucket of savings can be very beneficial over long periods of time. The rules are very complex, so check with your accountant. If you file your own taxes, a quick internet search can provide clarity.
  • If you have already made your contribution for 2021, consider making this year’s contribution now given that financial markets have declined to date in 2022.
  • Financial markets have been very volatile during 2022 and the first quarter ended with losses posted by many asset classes. Many will be surprised that statements from your custodians for the period ending March 31 will probably indicate losses since the end of 2021. Do not panic.

Remember that your balance at the end of 2021 was probably much higher than year-end 2020 due to the very good investment returns produced by financial markets. Investing carries risks and one-quarter of returns should not impact longer-term goals. Resist the urge to make a quick decision regarding “timing the market” by selling securities that have dropped in value. Instead, use the recent declines as an opportunity to review your asset allocation. Odds are that this could be a great time to rebalance.

  • The rate of inflation continues to soar and the U.S. Federal Reserve is slowly increasing short-term interest rates in an attempt to lower the inflation rate. This is good news for people who save, as the return earned on money market funds and savings accounts should start to move above 0% for the first time in many years.
  • More good news caused by the uptick in inflation may include higher pay as many annual increases are tied to the rate of inflation. If you received a boost in pay that was more than you expected, use this surprise as an opportunity to increase your retirement plan contribution by one or two percentage points, especially if your employer offers a matching contribution and you have not met the maximum.
  • The potential bad news is that higher interest rates will be charged on debt including car loans, mortgages and credit cards in the future. Also, be aware that as interest rates move higher, your finances may be impacted if your debt is tied to a variable rate. While interest rates have moved higher, do not forget that rates are still at historically low levels.

Action item for April: pick one item outlined above and investigate taking action to save more money to improve your financial security.

Beth Stegner Peabody is CEO of Stegner Investment Associates, Inc., and a 1979 graduate of Sacred Heart Academy.

Previous Cents & Sensibility columns may be viewed at https://therecordnewspaper.org/editorials-commentary/cents-sensibility/

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