Hello from Sycamore,
Inflation is a topic that we’re all hearing about lately. The Federal Reserve Bank (the Fed) has started to raise interest rates to help fight our current inflation. The Fed has a long-term inflation target of 2.0%. To simplify, this means that if a Coca-Cola costs you $1.00 today, then next year that same soda should cost you $1.02. When looking at the effect of inflation for a single year it seems insignificant, let’s look at the longer-term effects. Assume you have $100,000 sitting in cash earning no interest, what will this buy you 15 years from now assuming an average inflation rate of 2.0% each year? It would have a buying power of about $74,082 in today’s dollars. In other words, nearly a 25% reduction in purchasing power due to inflation. While your savings account balance is not declining, the amount of goods and services your money can buy, or your purchasing power, is reduced.
During your annual meetings, we update your financial plans and typically discuss your cash on hand and your emergency fund. This is a different number for everyone but typically somewhere between 3-6 months of living expenses is a good rule of thumb. Also, at different stages of your life, the number that’s right for you may change based on your situation and is a number that also coincides with your risk tolerance. The best number is the one that helps you sleep at night.
How can you lessen the impact of inflation? Our best advice is to keep your emergency fund such as a savings account or money market fund in a low-risk account that earns a competitive yield (several are yielding about 2% today). Then, to build wealth over the long term, try to maintain a well-diversified portfolio of various financial assets that have the potential to grow at a rate greater than inflation.
As always, never hesitate to contact us with any questions or concerns.
Thank you for your continued trust and support,
Sycamore Financial Group
***This article is distributed for general informational and educational purposes and is not intended to constitute legal, tax, accounting, or investment advice.***