I recently had a conversation with two young men. One confided that he hoped to be a millionaire by the time he turns thirty. The other remarked that one million dollars just isn’t a lot of money. Based on this conversation, can you predict who will have a greater worth in a decade?
On the one hand, the millionaire-wanna-be has ambition. He’s made his goal public so he feels more accountable. And, he has a benchmark to measure his financial success. He can ask himself if his financial decisions move him closer to, or further away from, his goal. He realizes that in order to meet his target, he needs growth-oriented investments, and at the same time, to protect his principal.
On the other hand, the young man who belittled a million dollars may be more aware of how inflation diminishes the value of money. He understands that a set amount of dollars doesn’t guarantee purchasing power; having money today doesn’t mean you can buy the same goods in retirement.
Does inflation make a difference?
Recently, egg prices rose; a few weeks before that, gas prices increased. While inflation touches your day-to-day budget, it can devastate long-term savings.
Depending on how funds are invested, their real value can increase/decrease based on inflation. Traditionally, bonds decrease in value in periods of high inflation. What can you invest in if you want to protect your purchasing power without super-high risk?
Here’s a tip
In the United States, Treasury Inflation-Protected Securities (TIPS) are a popular option. When prices (and the Consumer Price Index) rise, so does the value of a TIPS investment. Not only does the base value increase, but since interest paid is dependent on the base value, the amount of interest payments rise when the underlying value increases.
Many of my clients who think inflation will increase are moving a portion of their assets into TIPS. If you want to protect the value of your money, let’s begin a conversation to make sure your investments are working their hardest. Be in touch: doug@profile-financial.com
Douglas Goldstein, CFP®, GFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published September 30, 2021.