spending Archives - The Free Financial Advisor

The dynamic of employment changed dramatically because of the pandemic and the stimulus provided to consumers as a result.ww

People were let go from their jobs, especially jobs that didn’t have a way to “work from home”. Factory jobs and jobs in the service industry, for example.

Government Intervention

To combat a declining economy and unemployed workers struggling to make ends meet, the government decided to inject liquidity into the market. They did this through increased unemployment benefits and stimulus payments to those that qualified.

This aid sent to consumers helped out a lot of people, but it didn’t entirely go according to plan. One of the intentions of the stimulus payment was to incentivize people to spend – that’s why a large number of the second payment came via a Visa gift card.

When people spend, the economy does better.

Unfortunately, people saved their stimulus payments, but thankfully the market and the economy didn’t suffer as a result.

Rising Prices

That leads to the predicament we could soon find ourselves in. The economy is doing better. The majority of the United States population has been vaccinated (just a reminder that a majority is anything over 50%). Daily life is starting to return to normal; it’s happening slowly, but we are trending in the right direction.

As people grow more confident in their ability to go out into the world, and they get more confident in the economy and the market, they’re likely to spend some of that savings.

Low rates, decreasing unemployment, and more spending are three legs to likely inflation pressures.

Inflation

Now, I know I wrote about inflation pretty recently (here), but I feel it’s necessary to beat that drum again.

The FED already said that they will be more liberal when it comes to monetary policy. That means they will be more likely to let inflation run hot (relative to their 2% inflation target) for an extended period of time.

What they are doing with that stance, is they don’t want to kill a recovery when it’s just getting started. That’s what happened in 2018 when they raised rates throughout the year, but that increase in interest killed the economic growth and popped a bubble.

Okay, so the recipe for inflation is set, but what does that mean for me?

Honestly, that’s hard to say. We already said that inflation is likely, and in some cases, it’s already here. The question is, how much inflation is too much? This question will be answered by the FED.

And the answer will show itself when they relax their easy monetary policy. Interest rates could go up and the FED’s balance sheet could reduce in size.

At that point, I believe it’s only a matter of time (my hunch is not a lot of time) until the bubble we’ve created pops.

If you’re invested for the long haul, hunker down and hold steadfast. Avoid panic selling. If your time horizon is shorter, soon may be a good time to take some profits and de-risk your portfolio.

Disclaimer

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com

Establish an emergency fund, pay down debt, save for retirement, and grow your wealth! Much of your financial life is focused on the things you should do.

However, what I think to be more important are the things you shouldn’t do!

Educational Debt

There’s been a lot of literature/news over the last few years about how much of a problem student loan debt is. As of 2018, total student loan debt was $1.47 trillion. With a T! (Source)

That said, here are some things you should avoid.

Taking on too much – Some degrees/professions require a lot of schooling, which can lead to large amounts of student loan debt. And I don’t mean to speak ill of any degrees/professions, but if your desired career requires a “basic” 4-year degree, it’s probably best to find an in-state university to cut costs. Better yet, start at a local 2-year university or tech school until your Gen. Eds. are complete, then transfer.
Not having a plan for after – I think this is a common fear for Millennials and Gen Z, but you have so much time to figure things out. Don’t just go to college to get a degree. If you need time, take time. Once you figure out what you want, determine what you need to do to get there.
Not researching options – There are SO many student loan options. Depending on what type of loan you choose (private or public), you could have a wide range of payback methodologies. I wrote about student loan options and payback options in two previous posts. Check them out!

Credit cards

There are two BIG problems with credit cards. People who use them irresponsibly and people who don’t use them at all.

Using irresponsibly – This one pretty much speaks for itself. This pertains to people who spend way more than they ought to. A good rule of thumb is to only buy something using a credit card if you have the funds readily available to pay the balance off. Don’t have the money, don’t put it on the card. Doing so will cost you in interest and can really set you back.
Not using at all – Better than the first point, but still not great. Using a credit card can help your financial situation if you use it correctly. Most of them have rewards of some sort. It’s another credit account on your report. Charging and paying off right away establishes a good payment history. All good things for your credit score.

No emergency fund

Establishing an emergency fund is Step 1. If you don’t have money set aside for unexpected expenses, you’ll have to charge it. This leads to the point above about irresponsible use.

Save $1,000 for emergencies, turn your attention to high-interest debt (credit cards), and then shift your focus back to your emergency fund once that debt is paid off.

Spending

Paying bills late – Not paying your bills on time, especially ones shown on your credit report is a big mistake. The #1 factor in calculating your credit score is payment history. Paying ONE bill late will knock your score down. Just one. Don’t do it.
Spending too much – (See irresponsible credit card use) This is especially harmful if you frivolously spend BEFORE taking care of important “budget items”. Things like saving, debt payments, and bills.
Being too frugal – Though frugality is helpful in building wealth, it can also hurt you. There comes a point when you are too frugal. A vital life skill is doing things in moderation. If you pinch pennies and forego rewarding yourself, you run the risk of breaking the bank on a “bender”.

Investing

Waiting – I cannot stress enough the importance of investing early. What helps you make the most of your retirement savings is compound interest. The more time you have to invest, the more compound interest works in your favor.
Panic selling – This is a timely point since the market dropped almost 5 percent in the last week. Selling out of fear is always bad. More often than not, when you “panic sell,” you’ve already experienced the majority of the drawdown. Now, this depends on your particular situation, but it behooves you to stay invested during that period.
Using generalities when setting up an investment plan – Your investment plan needs to reflect your goals, risk tolerance, time horizon, and behavior. Using generalities is good for someone who writes about this stuff, but it’s not good for YOU. Your plan has to be tailored to YOU.

Life and Wealth

Sticking with a job you hate – Sometimes money and comfort makes us do things we don’t want to do. Being unhappy at your job is not worth it. It’s important, however, to thoroughly think through this decision. Quitting is tough, but if your family counts on you for income, you need to have a plan in place before you jump ship.
Comparing yourself to others – I’m going to encourage you to develop a new mindset because society taught us that wealth looks like fancy cars and big houses. I want you to think about stealth wealth. It’s probably my most favorite phrase/term. Someone with stealth wealth lives within their means. They live in a modest home, drive a car for transportation only, but saves more than the average person. They don’t “look” wealthy, but their retirement account says otherwise.

Employment, Stimulus, and Rising Prices