Inflation and Your Financial Plan: Are You Doing Enough to Protect Your Money?
A client recently asked me a question that I suspect is on the minds of quite a few people:
“I've been reading a lot about inflation. Are there any additional strategies we should consider to protect ourselves?”
It's a good question—and certainly an understandable concern.
Whether it's groceries, insurance, healthcare, housing, or travel, just about everything seems to cost more these days. Even when inflation slows, prices generally don't return to where they were a few years ago. They simply increase at a slower pace.
Add headlines about government debt, federal deficits, and concerns about the long-term value of the U.S. dollar, and it's natural to wonder whether we should be doing something different with our money.
But before making major changes, it's important to understand that a well-designed financial plan already takes inflation into consideration. In fact, many of the strategies we use in managing investment portfolios are specifically intended to help preserve purchasing power over time.
And protecting yourself from inflation goes well beyond your investments.
Understanding the Real Impact of Inflation
Inflation is simply the gradual increase in the cost of goods and services. As prices rise, each dollar buys a little less than it did before.
For example, something that costs $100 today would cost approximately $134 in ten years if inflation averaged 3% annually. That's a meaningful increase, particularly for someone living on a fixed income or planning for a retirement that could last 25 or 30 years.
This is why inflation matters so much in financial planning. It's not enough for your investments to grow in dollar terms. Ideally, they need to grow enough to help maintain your purchasing power after accounting for inflation and taxes.
The challenge is that we can't predict inflation with certainty. Some years it will be relatively low. Other years, it may rise unexpectedly.
Rather than trying to forecast inflation, I prefer to focus on building financial plans that can adapt to different economic environments.
A Diversified Portfolio Is Your First Line of Defense
One of the most effective long-term strategies for addressing inflation is maintaining a diversified investment portfolio rather than holding too much money in cash.
Stocks are particularly important for long-term growth.
When I talk about investing in stocks, I generally don't mean buying individual company stocks. We primarily use broadly diversified, low-cost mutual funds and exchange-traded funds (ETFs). These investments allow us to own hundreds or even thousands of companies through a single fund.
When you invest in a stock mutual fund or ETF, you're ultimately investing in businesses. Over time, successful companies can increase prices, grow revenues, improve productivity, and generate higher earnings.
That ability to grow is one reason stocks have historically been an important source of long-term protection against inflation.
Of course, stocks don't outperform inflation every year. There will be periods when stock prices decline even as the cost of living continues to rise. But for money that won't be needed for many years, a diversified stock portfolio can provide an important opportunity for growth.
International diversification also plays a role.
We invest in international stock mutual funds and ETFs because we don't want our portfolios to depend entirely on the U.S. economy.
Owning companies outside the United States provides exposure to different economies, industries, and currencies. This can be particularly helpful when investors are concerned about a long-term decline in the value of the U.S. dollar.
International investments carry their own risks, but they provide another layer of diversification.
How Bonds Help Manage Inflation Risk
Bonds serve a different purpose than stocks. They generally provide income, stability, and diversification within a portfolio.
Just as we primarily use mutual funds and ETFs for stocks, we also use bond mutual funds and ETFs to invest across a diversified collection of bonds.
One important type of investment is Treasury Inflation-Protected Securities (TIPS).
TIPS are U.S. Treasury securities whose principal value adjusts with inflation. As measured inflation rises, the principal value increases, helping protect purchasing power.
We may use mutual funds or ETFs that invest in TIPS as part of a diversified bond allocation. It's worth remembering that TIPS funds can still fluctuate in value as interest rates change, so they aren't entirely risk-free.
Another option is Series I Savings Bonds, commonly called I Bonds. Like TIPS, I Bonds are issued by the U.S. Treasury and are designed to provide inflation protection. Their interest rate includes an inflation component that adjusts every six months.
Unlike TIPS mutual funds and ETFs, I Bonds are generally purchased directly through the Treasury and held as personal savings. They have annual purchase limits, cannot be redeemed during the first 12 months, and carry an interest penalty if redeemed before five years.
For these reasons, I Bonds may be appropriate for a portion of longer-term savings, but they're not necessarily suitable for emergency funds that need to remain immediately accessible.
We also tend to emphasize shorter-term bonds rather than taking excessive interest-rate risk with longer-term bonds. Shorter-term bond funds generally experience smaller price fluctuations when interest rates change and can reinvest maturing bonds at prevailing rates sooner.
Finally, real estate and, in some portfolios, a modest allocation to gold can provide additional diversification. Neither is a guaranteed inflation hedge, but both can behave differently from traditional stock and bond investments under certain economic conditions.
Housing: An Often-Overlooked Inflation Consideration
Protecting yourself from inflation isn't just about investments. Your housing situation can also have a significant impact on your long-term financial security.
If you own a home with a fixed-rate mortgage, you already have a measure of inflation protection.
Your principal and interest payment remains the same even as the cost of living rises. Over time, inflation can make that fixed payment less burdensome in purchasing-power terms.
Of course, other homeownership expenses—including insurance, property taxes, maintenance, and utilities—can still increase.
For renters, particularly those living in high-cost areas such as the San Francisco Bay Area, inflation can present a different challenge.
Unlike homeowners with fixed-rate mortgages, renters may face substantial increases in their monthly housing expenses over time.
That's why it's especially important for renters to incorporate future rent increases into their financial plans. Depending on individual circumstances, negotiating a longer lease, evaluating alternative housing arrangements, or maintaining flexibility about where to live can help manage this risk.
And while purchasing a home may eventually make sense, buying simply because of inflation isn't necessarily the right decision. The costs of ownership, available savings, expected length of stay, and overall financial goals all need to be considered.
Your Spending Is One of the Things You Can Control
Perhaps one of the most overlooked ways to manage inflation is understanding where your money goes.
We can't control inflation, interest rates, or the financial markets. But we generally have more influence over our spending decisions.
Having a realistic budget—or simply a good understanding of your regular expenses—makes it easier to identify where inflation is affecting you most and where you have flexibility to make adjustments.
This doesn't mean eliminating everything you enjoy.
It means being intentional about your spending, periodically reviewing recurring expenses, and making sure your money continues to support the things that matter most to you.
Small changes can add up. Reviewing insurance premiums, subscriptions, utility costs, and other recurring expenses may uncover opportunities to save without meaningfully affecting your lifestyle.
Managing spending can also reduce the need to rely on credit cards or other consumer debt to cover everyday expenses—something that becomes especially important when interest rates are high.
Make Sure Your Cash Is Working for You
Cash deserves attention as well.
We want enough money available for emergencies and expenses over the next several years, but we don't necessarily want large amounts sitting indefinitely in accounts earning very little interest.
High-yield savings accounts, money market funds, Treasury bills, and short-term certificates of deposit (CDs) can all be appropriate choices, depending on when you'll need the money.
The objective isn't necessarily to earn the highest possible return on cash. It's to maintain safety, liquidity, and a reasonable return while avoiding unnecessary loss of purchasing power.
For money that won't be needed for many years, however, holding too much cash can create its own risk: inflation may gradually erode its value.
Should Inflation Change Your Investment Strategy?
This brings us back to the original question.
Should concerns about inflation, government debt, or the declining purchasing power of the dollar cause us to make major changes to our investments?
Generally, I don't believe they should—provided we already have a well-diversified portfolio appropriate for our goals, risk tolerance, and time horizon.
Making major investment changes based on economic forecasts requires getting two decisions right: knowing when to make the change and knowing when to reverse it.
That's much harder than it sounds.
Instead, I prefer portfolios that don't depend on any single economic prediction coming true.
We use diversified stock mutual funds and ETFs for long-term growth, bond funds and ETFs for income and stability, inflation-protected investments where appropriate, international investments for additional diversification, and sufficient cash for near-term needs.
Equally important, we regularly revisit financial plans to account for changes in spending, income, investment performance, and personal circumstances.
The Bottom Line
Inflation is a real concern, particularly for retirees and those approaching retirement. Even relatively modest increases in the cost of living can have a meaningful impact over time.
But responding to inflation doesn't necessarily mean buying gold, making major portfolio changes, or trying to predict the next economic downturn.
Often, the most effective strategies are the ones we've already incorporated into a thoughtful financial plan: diversification, disciplined investing, managing spending, keeping debt under control, and maintaining appropriate cash reserves.
No investment strategy can completely eliminate the effects of inflation. But we can prepare for it.
Good financial planning isn't about predicting exactly what inflation, interest rates, the stock market, or the dollar will do next.
It's about building a financial plan that can adapt and remain resilient through a variety of economic conditions.
If you have questions about inflation or how your financial plan is positioned, I'm always happy to discuss them with you.
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This article is provided by Attune Financial Planning for general educational and informational purposes only. It is not intended as personalized financial, investment, tax, or legal advice. Investment values fluctuate, and no strategy guarantees protection against inflation or investment losses. Please consult with your financial, tax, or estate planning professional regarding your individual circumstances before making financial decisions.