As the Fed Hikes Interest Rates to Fight Inflation, Ask Your Financial Advisor These 5 Questions Now

Prices are rising all over the world.

With a lot of economists forecast a recession in 2023, it’s time to take stock. Are you planning a winter vacation? Do you want to buy this costume or dress for the office party? Are you considering trading in your old clunker? Is it a good time to accept that dinner invitation at a restaurant that will cost you $100 for a meal?

US inflation was 8.2% in September, its highest level in 40 decades. In the UK, the rise in the cost of living was 10.1% year-on-year in September. Eurozone inflation jumped 10.7% in October more than a year ago, the highest in the zone’s 23-year history. In Singapore, it was 7.5%. In China, inflation was 2.8% in September.

Global prices began to rise during the COVID-19 pandemic, taking many economists by surprise as lockdowns disrupted supply chains. They increased further after the Russian invasion of Ukraine earlier this year and the sanctions which affected the supply of agricultural products and energy.

Be realistic about your financial goals and be prepared to make tough decisions to achieve them.

On Wednesday, the US Federal Reserve added another 75 basis point hike in a key interest rate as it attempts to cool 40-year high inflation. This is the fourth straight 75 basis point hike in the federal funds rate this year, bringing it into the 3.75% to 4% range. It was close to zero last year during the holiday season.

Prices eat into people’s budgets. The share of workers who report living paycheck to paycheck in 2022 has increased among middle-to-high income earners – 63% and 49%, respectively – from 57% and 38% a year ago. year, according to a recent survey of nearly 4,000 workers by online lending specialist LendingTree.

And now? Be realistic about your goals — and be prepared to make tough decisions to achieve them, said William Thompson, financial planner at Boston, Mass.-based Valor Wealth Partners. “That doesn’t mean we have to completely abandon our goals. It may take a little more work or a little more intentionality,” he said.

Here are five questions to ask financial advisors now:

1. Do I have a long term financial plan?

Jennifer Kang, financial planner and founder of JWK Financial in New York, said everyone should ask themselves, “Do I have a proper plan in place? Such a plan is about big decisions, including whether you intend to stay in your job, assessing your home buying timeline and/or when you want to retire, she said. declared.

But there are things we can all do. Here is some strategic steps to help keep your finances on track: reduce debt, adjust spending, curb impulse buying, build emergency savings, talk to your landlord about rent, and avoid falling prey to mortgage settlement companies. for-profit debt.

Remember the bottom line: “I earn X amount, I spend X amount, and I save X amount. It’s me and I’m happy about it,” Kang said. “If you already have a plan in place, that shouldn’t change too much.” But revisit these questions if your income changes, if you lose or change jobs and/or if your mortgage/rent increases.

2. What is the impact of inflation on my cash flow?

What does inflation mean to you? It depends on your situation. Inflation is good if you have a fixed rate mortgage and are locked in at a low rate – in this case your mortgage payments become cheaper in real terms. However, it’s not okay if your landlord raises your rent and you face an increase. student-debt and food prices.

Alex Borgardts, financial advisor and co-founder of Next Bloom Wealth in Kansas City, Mo., calls this your “personal inflation rate.” In other words, everyone’s relationship to rising prices is unique. If your energy bill is rising and you have few opportunities to save money on electricity, cut your spending elsewhere.

Inflation reduces your purchasing power. Because of this, your bank balance is worth less in “real terms” when adjusted for these higher prices, Alonso Rodriguez Segarra, CEO of Coral Gables, Florida-based Advise Financial, wrote in a recent column. How you use that money is more critical than two years ago.

3. How diversified is my portfolio?

How exposed is your portfolio to different sectors and markets, and how much have you invested domestically versus internationally? MarketWatch columnist Philip van Doorn suggests 27 stocks that can give you a more diversified portfolio than the S&P 500 SPX,
– and that, he writesis a key advantage right now.

Your risk tolerance is key: “2022 was a great time for people to take a step back and reanalyze their comfort with risk,” Borgardts said. “In good market years, it’s easy to get comfortable and not pay much attention. When we feel [the impact of] in more volatile markets, it’s easy to get emotional and make changes.

On Wednesday, the Dow Jones Industrial Average DJIA,
is down 10% or more than 3,600 points since the start of the year. Excessive inflation reduces the value of investors’ cash and encourages the Federal Reserve to fight inflation – with aggressive increases in interest rates – and this can weigh on stock and bond prices.

4. Do I have emergency savings?

Keep an emergency fund accessible at all times, in case of job loss, medical emergency or any other unforeseen event, Segarra added. Likewise, Borgardts said people should check with their financial planners about the amount of cash in their investment accounts. (Often investment managers will keep a small portion of the client’s portfolio in cash.)

The “savings surplus” — the amount households have saved compared to what they would have saved without the pandemic — was $1.7 trillion in mid-2022. But it doesn’t affect all Americans equally: $1.35 trillion of that was held by the top and third income quartiles. In the second quarter of 2021, the savings surplus stood at $2.26 trillion as many people received money from government benefits.

Meanwhile, the personal savings rate—savings as a percentage of disposable income— fell to 3.3% in the third quarter down 3.4% in the previous quarter, the government said last week, the lowest level since the Great Recession. Economists haven’t fully compiled the impact of the coronavirus pandemic on savings, but those numbers have brought the subject of cash to the fore.

5. Should I change course now or not?

If you don’t qualify for President Biden’s federal student loan forgiveness, check to see if you can afford to repay your student loans now, Kang said. As interest rates rise, variable rate loan repayments will also increase. For this reason, now is a good time to pay off personal loans and unpaid debts on credit cards.

But Thompson advises against any sudden movement. “You can’t necessarily stay with the current allocation, but don’t exit completely,” he told MarketWatch. Ultimately, playing the long game is key to success in the stock market, Kang added. And that means making no changes based on fear.

Sometimes the best action is no action. Weathering the bear market and economic uncertainty by not checking your wallet every five minutes can be a blessing. “Doing nothing is not a bad thing,” Kang said. “Just because something is happening doesn’t necessarily mean you have to make changes.”

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