Inflation has a way of eroding the purchasing power of our money over time, making it essential to plan smartly to ensure financial security. In this episode, Matt Robison and I delve into the intricacies of managing finances in the face of rising inflation. Most notably, we talk about the importance of aligning investment strategies with specific timeframes to make the most of your assets.
What does time have to do with investments? Quite a bit, actually. We are currently in a period in which our savings are generating some income. We are seeing a return on CDs, bonds, and even checking and savings accounts. You might find yourself in a situation where you have some extra cash (yay!) but don’t know what to do with it. The most effective financial planning requires aligning your investment choices with your anticipated expenses.
Consider the following:
- Short-Term Needs: Emergency Savings and Upcoming Expenses
- Maintain an accessible emergency fund (Cash, CDs or Money Market Funds) for unforeseen financial setbacks.
- Allocate cash for immediate needs or short-term expenses like a down payment on a house or a new car and keep those funds in appropriate safe options like cash, CDs, individual bonds or Money Market Funds.
- Medium-Term Goals: Two to Five Years
- Consider bonds and bond funds as a way to preserve capital and earn moderate returns.
- Evaluate investment options to counteract the effects of inflation on your money by getting some interest payments plus potential upside returns.
- Long-Term Investment: Over a Decade or More
- Stocks are the wisest choice for long-term growth.
- Companies adjust prices to account for inflation, offering an effective hedge against its impact.
- Real estate investments also present opportunities for long-term financial growth.
Inflation can indeed be a drag on financial stability, but with careful planning, it can also serve as a catalyst for creating a resilient investment strategy. By understanding the relationship between timeframes and investment options, you can take steps to navigate inflation’s impact on your finances.
Transcript
Inflation is such a drag. Hey, it's financial life planning, I'm Matt Robeson, with my co host, Mike Morton of Morton financial advice, Mike, do you feel like inflation’s a drag.
Mike:It's a serious drag.
Matt:Who uses that expression anymore, it's like, when were you born? I know when you were born, but like, here from the 70s, things are a drag. It's not groovy, it's a drag.
Mike:Wait, wait, do you have a problem with the way I titled this episode? Should that be the title? We’ll have to figure it out, maybe it's not the title.
Matt:Can I explain what my problem is? My problem is, look, there's no it's a very short thought train. It's I have a problem, this is an expression that comes from the 70s. I come from the 70s. I have a problem with how frickin old I am, I don't like to be reminded so thanks for rubbing my face in that to face my fears of aging and death. By the way, our recent show on your life doesn't matter. It was really great, it just came out. You're really you're really pounding my face in the dirt these days.
Mike:Yep. I'm just trying to keep you on your toes, Matt.
Matt 1:08
Well, actually, today's show is much more of a good news situation. I think for all of our listeners, then we're laying it out to be here because what you want to talk about is a good problem to have, which is, Hey, maybe I have too much cash in the bank. And when you've got relatively high inflation, that's not such a good thing. That's a good problem, right?
Mike:Yeah, yeah, I run across this all the time that I know, we've had some episodes, I was looking them up, they were quite a while ago. So I figured we touch on it again because this comes up with so many of my clients, which is, it's a great problem. And it's one of the reasons they're coming to me it's like to get organized and realizing like, Oh, I've kind of built up some cash, like I didn't have a plan for where to put on my excess savings and now I've got $50,000-$100,000 of extra cash in the bank and so let's come up with a better plan, how to use this and how I should be using it. So I thought it'd be really good topic to just hit on how to think about, you know, if you're in that situation of having some great excess savings, and you want to really come up with a plan, hey, wait a sec, what should I be doing with this?
Matt:It reminds me of when I was going to an advisor with my problem, which is that I'm too suave, attractive, and muscular. And, you know, he was really able to help walk me through that set of problems. So I'm glad you can be there for your clients who are just like we're facing this problem, this is good. And honestly, this is, it sounds like a good problem but actually, this is the kind of thing that can happen to a lot of people, you may not be like overflowing and wads of cash to actually be in a situation where inflation is up and you still have too much money in cash in the bank right now.
Mike:And there's a couple of things to be thinking about when we're talking about inflation. And the reason we're bringing that up is because even though it's great, I've been telling clients Oh, it's so nice, we're finally getting interest you remember, like, you might actually have to pay some taxes on your interest this year because, you know, your bank account is actually earning you some money for the first time. So that's great, you get up to 4 or 5%, we've mentioned that you should be doing that. But the downside is you're still losing buying power, because inflation is 6,7,8,9% So even though you're making more money, your bank account is growing, your buying power, when you turn around and try to buy a pack of gum or buy a car, you will be shocked at the the current prices, you know a year from now.
Matt:So, you know, as we record this, inflation has been coming down, wages have actually been getting out ahead finally, of of price gains, and the pressure is easing a little bit, but like how can you tell if maybe you're in the situation where I'm just keeping a little bit too much in cash and it feels like hey, you know, I'm earning some interest, but maybe I'm still falling behind?
Mike:Yeah. So if you, it's an easy one, everybody knows if you've got too much if there's more than you need, what I call a working capital, like you have your direct deposit coming into your checking account, and then you're paying your credit cards from there and your other bills from there and if that balance, you typically everybody's got a number in their head I typically keep that around 5,000 or 10,000 or 30,000, whatever is comfortable for you. But if it's growing above that, that's when you're like, right, it's great, got some extra money, but yeah, it's growing. I usually keep it at $20,000. And now it's every month is kind of at $40,000. So you got some extras there so you know and so what do you end up doing with that? Okay, and I'm gonna give you the bottom line up front, okay, and I'm going to tell you a couple of stories and how you can think about this. What I want you to do is marry you know, the one thing I've been talking about recently is marrying your way…
Matt:Don't tell me to marry someone else now. Don't do it. My wife listens to this show.
Mike:Wait she does? That's shocking. That's great.
Matt:She’s fond of us.
Mike:All right, we'll have to get some feedback on how I could improve the show, get a new host, hopefully she doesn't say that
Matt:That doesn't specify which one. One of you is a problem.
Mike:One of you as a problem. Alright so marrying the time horizon of when you want to spend your money to how you have that money saved or invested or where it is. Okay. So, for instance, I just said working capital working money that there you know, the money that you're spending each month, well, that's obviously just living in your checking or savings account, direct deposit comes in paying off the credit cards, other bills, or your Netflix and stuff out of there.
Matt:So that's a high percentage of my outlays. Exactly. Netflix, Disney, Toe Jam I don't know they’re all out there.
Mike:Exactly. Well, you know, because we have the multiple kids. Yeah, each one needs their own streaming service and we can't possibly get rid of that one. I still watch that one.
Matt:Yeah, exactly.
Mike:So that's just your every day, right. So that's just hitting the end, whether you're earning interest on that or not, doesn't really matter, because money's coming in money's going out. Now, if you're going to spend some money in the next year, hey, I know I need to buy a new car or something like that, then you also just want to have that money really safe, you don't want it to go down in value. So you don't want to lose any of that money if you've built up 10-$20,000 that you're going to use next year. So put that into a CD certificate of deposit, you can put it in brokerage account, money market, something like that, where you can get that 4 or 5% interest, you know, don't just leave it in the checking account where you're getting nothing, get 4 or 5% interest in a certificate of deposit CD, or a money market account. And you're going to spend that next year so that's a perfect place for parking that money.
Matt:What's interesting is that it's not, it's very situationally dependent on what you just said, because you can't just say it's like a pamphlet you get at the doctor's office, it's like, so you're thinking that you might have too much money in your checking account, find out if Morton is right for you. But it's not the kind of thing where you can just say, I have X number of dollars, therefore that's right, or that's wrong. For example, if you said if I have a major purchase coming up, so like if if I'm going to buy a house, like it could be okay to have a lot of money essentially sitting in the bank.
Mike:Yes. In fact, you've led me straight into my story number one. I got a friend called Jerry, and I've been working with him for a while. And he's got over $300,000 in cash, not literally cash, he's not like sitting on a suitcase of mone but he's got $300,000 sitting in money market funds on CDs, just super, super short term stuff, not going to go down in value, earning that four or 5% interest. The reason we're keeping it there is because he's interested in changing homes, moving from one home to another home, family is getting a little bit bigger and need a little more space. They live in currently, like an $800,000 home, they want to move to like a $1.2 million home, get another bedroom and so we need that downpayment because they probably want to purchase a house and then sell theirs they don't want to make it contingent and all that stuff. So we want to have that cash ready at any time that they find a home. And so there's a perfect use case, even though it's hundreds of thousands of dollars. All right, you might want to just leave it in cash now. Again, not literal cash, get your 4 to 5% interest on that stuff.
Matt:Reminds me of that mcBaine moment on The Simpsons. It's like how do you sleep at night, on a pile of money with many beautiful ladies, which is how I sleep at night. Another one of my problems that I go to find it oh my gosh, my wife listens to the show. Never I take it all back. Yeah, not not true. Okay, so that could be a situation. But the inverse isn't necessarily true as well. It's not like if you're if you're sitting there and you've got a lot of money that's always going to be okay, either.
Mike:No, yeah, absolutely. So I'll get to another story in a minute but let me walk through if you're not in that situation, hey, I got some excess money. But I'm, I'm not planning on spending, I thought through first of all, think through next 12-24 months, one to two years, hey, anything coming up? And if you're like, not really, then we move on to step two, if you're going to spend the money again, when are you going to spend those dollars? So you got $1,000, what are you going to spend it on if it's not in the next year or two, then if it's in the next three or four years, five years, maybe you got college expenses coming up in three or four years. We want to again, we don't want that money to go away be very risky. All right, we don't want to invest it in Matt's new startup business where it's gonna go under a couple of months.
Matt:No, no, no, no. It’s not going under. But you know, I want investors to come anyway.
Mike:Right, so we don't want to risk it too much so that's where bonds come in. Now those IOUs you're lending money you can lend it to the government it's pretty safe. And you can get again, 4,5,6 percent interest maybe and you can do in a variety of bonds. And those bonds might not only interest, they could go up in value, bond funds can go up and down in value, but they're not as volatile, they don't go up and down as much as stocks might go. So again, we want to avoid stocks, maybe because if we want to spend $10,000 3 years from now, I don't want to lose 20 or 30% of it. And that would be very normal for stocks, they do that all the time, they get down 20-30% in a couple of years and you don't want that to happen. So put them in safe bonds so again, the time horizon for when you're going to spend two to six years from now, put that into, you know, you can consider putting that into like a bond fund. Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life? Go to meet Mike morton.com. All one word, meet Mike morton.com.
Matt:What if you’re in between right? Like, it's not that I'm going to spend a bundle of cash in the next couple months it's not that I'm going to spend a bundle of cash in three or four years. If I'm in between it six to 12 months is that the case for a CD? Or maybe even iBonds through the Treasury Department?
Mike:I wouldn't do iBonds because they have redemption problems in the short term. So you want to stay away from those if you're going to be using it in the short term. But yeah, anything like one to two years, just cash, CDs, money markets, keep it in that really safe stuff, two to five years, that's when you might say, hey, I want to get a little bit more kicker hopefully, and the bond market tends to do fine year over year, except for last year doesn't tend to lose a lot of money. So that's a pretty good place and then finally, you go beyond that you're like, geez, I'm not going to spend this money for at least 10 years or more. That's when you can go ahead and put those dollars into the stock market. And the reason why the stock market is the place to put the long term money, alright so Jeremy Siegl has written a book stocks for the long run, which I love. It's a thick book, but here's the upshot. It’s stocks for the long run, okay, you put $1, he did all the charts between Hey, should I invest in bonds, or stocks, or just dollars cash, right? So for the last 200 years, 200 years, he tracked, went back and built the data. You know, if I just had $1, if I put $1, in 200 years ago, I'd actually ended with four cents today. That's inflation. Okay, that's called inflation, like you got negative real returns. These are called real returns your buying power. Okay, so you put $1 and how much is how much can you buy these days? It'll be worth four cents. All right. So that's what inflation does over the time. And then bonds they do pretty well. So you invest the dollars 200 years ago, grows to $2,000. Okay, that's pretty good. $1 goes to $2,000 over a couple 100 years. But here's the kicker stocks that were $1 grossed over 2 million. Right. Okay, so that's two orders of magnitude more. So stocks are the place to be when you talk in 10-20 years of investing timeframe, when you get to spend the dollars in the farther future. Go ahead and get that into the stock market.
Matt:So there's a little bit of fool's gold in the higher interest rates that you could be getting like, Hey, in savings, I'm earning 5%, it's still It depends. Even at that level, you might not want to leave your cash there.
Mike:Yeah, well, that's it, you don't want you definitely don't want to if you have cash, again, I'm going to spend this in 10 or 20 years, you know, this $10,000, even though you can get 5%, you're like, Oh, that's really good. Inflation is still eating that away. Alright, the stock market's a better place to be. Let me tell you a little bit about why so that you understand, why would I get why would I invest in a company when I could just get like a guaranteed 5%? First of all, the 5% is going to be going up and down? I already told you inflation is eating away your buying power? Why would you invest it in a company, right? Companies make products and services that we want to buy as consumers and as you just said, the wages are going up. That means the company's costs are going up, guess what that means? That means the price of their products and services are going up. Like how about Disney, they just raised their you know, a buck or two a month for all, you know, each of those streaming services is going up, like by a buck or two a month.
Matt:They actually showed up with a bulldozer and took a portion of my house.
Mike:Exactly, exactly. Those products and services increase, and we keep paying for as long as it's products and services that we like, right? Good companies we want to keep buying from, and so they keep charging more. And that's why if you're investing with them, that's a great inflation hedge is what we call it. It's a great way to keep up with inflation, because companies have to keep charging more so they can keep making profits. That's the point. And so it's a great place to have your dollars invested to keep ahead of inflation.
Matt:So bonds are more like The pier at the edge of the sea, they're anchored in place and a rising water level could top them over. Stocks are more like a ship they're going to rise with that inflation tide. And I am like a submarine because I cannot frickin stay above the water. I'm serious I am like the worst. My son is a champion swimmer. I cannot stay above water. What the hell? But anyway, is that is that analogy more or less?
Mike:I'd recommend not jumping into deep water, Matt, then.
Matt:I try to avoid it at all times. I'm like one of the few people on earth that can't stand the frickin ocean.
Mike:Well, that's because we live in New England, no one can go in the ocean up here.
Matt:I was born on a small island off the coast of North America. Manhattan Island is still fundamentally traceable. Yeah, a few people been there. Mostly kind of people, whatever you, you know, so but stocks do float that way. Because the companies that under stocks are price sensitive.
Mike:I understand the analogy you're going for, I don't think it makes any sense. But I appreciate you throwing it out. It's not resonating with me Matt, the boats going up and down. Rising tide raises all boats? I guess. Okay. I agree with you. Well, except yours your sinking.
Matt:
But we’ve talked about on this show before about the fact that bonds are sensitive in this way to inflation, you do have to be careful about these kinds of fixed investments that it can be degraded.
Mike:Yeah bonds rise, I said that bonds not only gives you interest payments, right, which might be that again, 4 or 5% today, but then also they can go up and down in value. And if and when the Fed starts decreasing rates, when we get inflation more under control and wage pressures now rising, then interest rates come down. And that will actually boost your bond profits. So it's a good idea to hold some bonds at the moment for that reason as well, not only if you're going to be spending the money, in a little while, but bonds are a pretty good spot to have some money as well,
Matt:Because of that diversity in your portfolio.
Mike:Well, we're going to talk a little bit about that another episode, I think that, again, this idea of keeping your money, the time horizon of your money really does match up to where you want to be investing that money because as you have longer time horizons, 10, 20, 30 years, you think stocks are risky. That's what always what you've heard, stocks are risky, be careful, you can lose your money. And I just told you in one or two or three years, of course, downturn of 20, 30, 40% is very typical, okay, it's not going to faze me, I'm not going to be like, Oh, my gosh, that was out of nowhere. No, that's like, that's a normal thing. But when you get to 10 or 20 years, the average really starts averaging out, right. And so that volatility is no longer there, stocks do very well over 10,20, 30 year time periods, you're much more likely to come out way ahead by owning stocks versus any other asset class bonds, cash or anything else.
Matt:What about commodities, real estate, we've talked before about some more exotic investments. I mean, that like unusual, I don't mean that in a weird way.
Mike:Yeah, those are good, too. I like real estate for a variety of reasons, that asset class, as we call it, has good returns over a long period of time. So it's another one I like, commodities is a really tricky one, I tend to stay away from them. But the research is not as well done in terms of long term good returns, they're way more finicky, and they don't necessarily return as well. Now, there's lots of people out there that invest and know what they're doing around commodities. I just when I look at the historical analysis, which was what I pay attention to the academic research, 10, 20, 50, 100 years, you know, of looking at past returns for these different asset classes, real estate would be in there for me, but the commodities really would not be.
Matt:Alright, so I think just to bring this full circle for people, their starting point really should be it's back to that matching timeframes thing. So with that ignored, because it's so situationally dependent this is the way to go about this is to start to think about, well, what are my needs over the next six months, a year, two years, five years, and start to match them up with where my assets are. And if there's a mismatch, that's where you start to move things around. Although you probably shouldn't just do it willy nilly. Probably good to get a little bit of guidance with that.
Mike:Yeah, I think just moving things around on the board willy nilly and then check in another few months and do it.
Matt:Never mistake activity for achievement. I mean it’s like you could run around all you want so you don't want to rearrange the deck chairs, but I mean, but what I'm saying is, you don't want to just say, Hmm, my total expenses that I anticipate over the next year is x, you know, and I've got more than x fundamentally in cash in the bank. So now I'm going to start to put it places, you should still be thoughtful about where you put it.
Mike:Yeah, absolutely. I highly recommend being thoughtful about your actions. And in this case, to bring it full circle, you've got extra cash, it's great you've built up and said, Wow, I didn't I've already saved in my 401 K and other places, which is other episodes where to save, but you've got this extra cash so that's exactly what to do first emergency savings. Hey, make sure you got some access to cash that you might need case of an emergency. And then from there, probably, it's going to be long term money. That's usually what it ends up. But you might have some short term needs, house downpayment, I need a new car next year, kids going off to college, you know, just think through those situations. And if you're not coming up with anything, then get a little more aggressive with investing.
Matt:All right, Mike, anything else on this big problem of inflation being a drag.
Mike:This show started to be a drag can we end this one
Matt:We're out of here for Mike Morton, I'm Matt Robison. We'll see you next time.
Mike:Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or a question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice or opinions expressed as of the date of recording. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.
