How to Calm Financial Panic During Inflation Surges

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Four decades after the last big spike, people are not just thinking about inflation; they are naturally concerned about what the impact is on their overall financial situation. We spend a lot time talking with clients, especially entrepreneurs, about practical steps they can take in managing rising inflation. This is one of the biggest financial stressors over long-term.

We help clients adjust their spending habits and plan adjustments to reduce financial anxiety. These are muscles that have not been used in a while, making it more difficult. However, inflation can affect everyone’s life plans. Comprehensive planning can maximize the return on all aspects of a person’s financial life, both now and in the long-term, since many entrepreneurs have so much of the wealth in their businesses. Let’s now discuss ways to minimize financial stress during times of inflation.

First – Do not panic.

Inflation can affect not all investments. You should have plans in place to reduce the impact of inflation. You may need to reassess and adjust your plans along the way. Avoid making costly financial decisions by being objective and not emotionally involved in any changes. Emotions can cause financial disasters. Unforeseen things can and will happen. Be prepared, but also be flexible. Most importantly, find a way that you can make long-term decisions with a calm, objective perspective.

Related: Inflation Is a Risk for Your Business, But Doesn’t Have to Spell Doom

How inflation affects short- and long-term financial planning depends upon three questions: Is the inflation temporary or more persistent; is your net worth liquid rather than future earnings potential? And how long do you expect your business to continue operating before you exit or retire?

Temporary inflation is easier to manage than inflation that spikes over a few years. Our research suggests that the increase in goods prices will likely slow, but higher shelter inflation or rising wages due to a tight labor market may prove to be more persistent. Investors should not be too reactive, but have plans that can adapt to changing circumstances.

Second: Concentrate on what you can control.

You can’t control inflation and its impact on investments. Market action has an impact on portfolios. However, personal habits are important as well. You have full control over your spending habits. Individuals often have less control when everything costs more. Choose options that will help you to resist inflation.

Think of yourself as a business: Spend less, be balanced, conserve capital.

Unfortunately, some people spend more because they believe their money will be less valuable next year. However, this reduces their capital and unwittingly raises their long-term risk. Trusted advisors can help you do a fair review of your spending priorities.

Third – Be open to compromise

Whether you work with an advisor, or not, it is important to understand your finances and how they influence your views on money. There will be tradeoffs. Inflation can make those choices even more difficult. A sound financial strategy will take into account your priorities and values. In times of inflation spikes, it is important to ask yourself what tradeoffs are possible. This will help to reduce emotions and improve outcomes. This is true for your investment portfolio. Knowing what you are willing and able to live with over the long-term can help you make prudent portfolio rebalancing decisions and plan for retirement.

An entrepreneur’s perspective: Equity Over Debt

As a fellow entrepreneur who founded and sold two companies to Dow 30 firms over a couple of decades, I learned some valuable lessons. It becomes a necessity to pay attention to costs in inflationary times. When customers resist price increases, it becomes difficult to find ways to manage margins. You also have to bear higher input and interest rates costs. If interest rates continue to rise, it might be a good idea to raise equity capital instead of debt capital. The opposite has been true for the past decade.

Balance sheets could become unmanageable if inflation continues to be high. It is worth looking at recapitalizing and restructuring before you make any capital calls. Keep on top of it.

An investors’ perspective: Maintain a Well-Diversified Portfolio

Market volatility can make it difficult for investors to have a well-diversified portfolio that includes exposure to different asset classes. If the base case of continued U.S. economic growth with moderate but still high inflation is true, investors should consider adding stocks to their portfolio. Stocks have been the most consistent asset class in outperforming inflation for longer time periods. Stocks can and will be volatile, but they are an important part of a portfolio that achieves long-term growth. Investors have historically enjoyed positive returns by having a long-term perspective and remaining invested in equities, particularly during economic expansion.

Related: Maybe We Should Embrace Inflation

Investors should have high-quality bonds in their portfolio to provide diversification and a hedge against deflation.

As far as options like gold, other commodities, and cryptocurrency, there is not much evidence to suggest that they protect investors during market volatility and have not consistently outperformed inflation over longer time periods.

Inflation can cause financial anxiety as we don’t know when it will end or how bad it will get. This is not the time to overspend or take on large amounts of debt. If you are unsure about which investment decisions you should make, you can work with an objective person who is paid to help you navigate the difficult decisions. A good financial advisor will help you minimize stress and maximize your life’s return – today and tomorrow.

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