Recently the Federal Reserve made a decision away from its historical fight against inflation. Instead, it’s changing tactics to encourage inflation.
Don’t let that alarm you too much. In the choice between inflation and deflation, modest inflation is always the healthiest choice.
Even still, you’re probably worried about the financial outlook for the upcoming year. Here’s why you shouldn’t be (too) worried, and what you should focus on.
Why Isn’t Inflation Bad?
When people know their money loses value year over year, they’re more likely to spend it than save it. That’s what propels an economy forward.
On the other hand, when deflation occurs, people know their money will be able to buy more the following year. So they save it. This means there’s less money moving through the economy. Prices keep falling, people keep saving, businesses can’t afford to pay employees, people get laid off. They save because they don’t have an income, so prices keep falling. It’s a bad spiral.
Year over year, the federal reserve wants to see steady inflation of about 2%. But with the global pandemic, more people are saving instead of spending. Inflation isn’t hitting this standard benchmark. That’s what spurred the change.
That’s also why we’re seeing historically low interest rates today. Low interest rates encourage people to borrow money, which encourages people to spend money, which keeps an economy moving.
Should I Buy a House?
Right now prime interest rates for mortgages are at an all-time low, which makes it a great time to get a mortgage.
Except there’s a little catch. So many people want to take advantage of these awesome rates that it’s putting a demand on the market. At the same time, fewer people want strangers wandering through their homes, so fewer homes are going on the market.
Which means home prices are skyrocketing. So yes, you should buy a home, but only if you’re positive it’s a good deal. You make money when you buy at a great price, not when you sell at one. So if homes in your area are too expensive, it’s not worth it just to get a good interest rate.
Should I Save?
At all points in time, it’s a good idea to keep 3 months to a year’s worth of expenses on hand. This way if you get laid off, you can still cover your expenses. But once you have a hefty emergency fund in place, it doesn’t make much sense to keep saving.
The Markets Are Rocky, Should I Invest?
The markets will always be rocky. But there has never been a 20 year period when the markets returned a loss. So stay the course.
Keep investing as you normally do to buy and hold for as long as possible. This is historically the safest investment strategy. Be prepared to ride through some tough waves, and you’ll come out on top.
We’re also seeing a change to a LIBOR replacement. If you’re investing in foreign currencies, make sure you study the new replacement plans to see how it could affect your investments.
For Your Financial Outlook – Stay the Course
No matter what experts predict for the financial outlook of any given year, you should stay the course.
There are always ups and downs in any given market in any given year. The best thing you can do is keep 6 months to a year of expenses saved up, keep your spending low, and buy and hold your investments.
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