Welcome to our comprehensive newsletter on inflation. This year we have a number of themed newsletters and this time we're on a very timely topic: we're looking at the impact of inflation on various aspects of your financial life and how you can possibly benefit from it.
Because that may be surprising, rising prices are annoying but you can actually take advantage of inflation.
Do you have questions about the impact on your own circumstances? We are, of course, here to help.
We wish you a happy summer and see you soon!
Inflation and budget management
To begin with; a major concern with inflation is the natural management of your budget to keep your finances under control. Inflation naturally reduces the purchasing power of money as prices rise. This means you can buy less for the same amount of money, something we experience every day.
To deal with this challenge, you may need to regularly adjust your budget and prioritize your spending and even cut non-essential expenses. By being mindful of your budget and anticipating inflation, you can better manage your financial situation and continue to pursue your personal goals.
In addition, there are several aspects of inflation that have a positive as well as a negative side. By using the positive aspects and avoiding the negative ones as much as possible, inflation may not be so bad.
Below are the most important aspects.
Inflation and savings and investment strategies
During inflation the money you save loses its value, there is nothing you can do about that because that is exactly what inflation is. If you have a large savings pot or if you are just starting out, then either way that is bad news. Therefore, it is wise to perhaps not save but invest in things that are expected to increase in value.
Indeed, there are plenty of them, think for example of bonds, real estate or certain commodities. Investing, for that is what we are talking about, of course also has uncertainties and, for example, the category of commodities is only for specialists. So if you decide to start investing, it is wise to inform yourself well and preferably seek professional advice.
And there are lessons that are always true: diversify your investments, for example. By spreading your investments across different assets, sectors and regions, you can reduce risk while increasing your chances of beating inflation. With patience, discipline and a well-thought-out investment strategy, you can protect yourself from inflation and aim for long-term capital growth.
To carry out these considerations intelligently, we have selected several asset managers that may fit your investment strategy; at least they meet the right criteria to make investing successful.
Inflation and risk management
Inflation can affect several financial risks. For example, if you derive income from a fixed rate of return on your savings, its value may rapidly decrease during inflation, causing you to eat not the eggs but the chicken. In addition, the cost of living will rise, which can lead to financial stress. Therefore, it is good to build a buffer if possible. In that case, that buffer is money you set aside for unexpected expenses or emergencies.
Having such a piggy bank can give you peace of mind and protect you from financial setbacks. You cannot absorb everything but you can set aside an amount of three to six months' worth of living expenses in a separate savings account. This way you can absorb unforeseen expenses without getting into financial trouble. Of course, it is important to keep your spending habits under control and be aware of price increases. At the same time, there are announced price increases that you may be able to avoid. For example, if you are considering a new car and it will soon rise in price, you can also buy it earlier rather than later.
Inflation and tax planning
Inflation can also affect your taxes. If tax brackets are not adjusted for inflation (which is unlikely), if wages rise, you may end up in a higher tax bracket and pay more tax even if your purchasing power has not increased. It is therefore wise to consider strategies to minimize your taxable income and take full advantage of tax benefits. One way to do this is to take advantage of deductions.
The best-known example, of course, is the mortgage interest deduction or investments in certain renewable features such as solar panels or even a heat pump. It may also be wise to consider making pension contributions, for example in the form of annuities as these often offer tax advantages (see next point). It is always advisable to consult your advisor who is aware of the specific tax rules and expected changes and can help you optimize your tax planning.
Inflation and retirement planning
When planning for your retirement, it is also very important to take inflation into account. This is because the purchasing power of your retirement income will certainly be affected by inflation in the future. What seems sufficient to live comfortably on now probably won't be in 30 years. So it is essential to look into your pension plan and whether it takes inflation into account (by a fixed adjustment, for example), so that you have financial stability in the future as well.
Supplementing can be done, of course. One way to do this is to participate in an employer plan, if there is one, or take out an individual retirement account, such as an annuity account. These retirement plans sometimes allow you to make additional contributions every now and then and take advantage of tax benefits. It is also wise to diversify your retirement investment portfolio so that you own assets that are historically inflation-proof, such as stocks or real estate. It is important to regularly evaluate your retirement planning and adjust it to changing circumstances, your investment horizon and your life goals. So you can continue to build a solid financial future. So catching up with us annually is not only enjoyable, but above all wise.
Inflation and estate planning
Inflation can also affect the value of the inheritance you want to leave. If the value of your assets declines due to inflation, it will mean that your heirs will end up receiving less than you had planned. You may be able to overcome this by thinking about inheritance early and carefully and investing in assets that can withstand inflation. One way to consider this is to invest in real estate or other value-resistant assets.
This can be a second home, but also a stock portfolio that is already in the name of the heirs, for example, so that the increase in value is less taxed by inheritance tax. In this regard, it is very important to draw up a detailed and up-to-date will, in which you clearly define your wishes regarding the distribution of your assets. Consulting with your advisor (trained as a financial planner) can help you draw up a plan that takes inflation into account and ensures that your estate is later passed on as you intended while you enjoy living on your own for the time being. Based on that plan, we can have your will drawn up watertight at the notary.
Inflation and debt
The effects of inflation on debt can be both positive and negative, depending on the type of debt and the interest rate. If you have debt with a fixed interest rate, inflation can work in your favor because you have to pay back the same amount while the real value of the debt decreases. This means you are actually returning less value than you originally borrowed. It can also be a good time to take advantage of low interest rates if you still have them, by consolidating your debts or paying off debts with high interest rates. On the other hand, new loans may become more expensive or variable interest rates may rise, which can be a challenge in managing debt during inflation.
It is important to carefully review the terms of your debts and seek advice from us to determine the best strategy in line with your financial plan. After all, by not repaying a loan with a low interest rate, your debt decreases relatively and you are left with money that you can use in one of the strategies mentioned earlier such as an annuity that does survive inflation.
Inflation and DVO
Inflation is an important factor that can affect various aspects of your financial life. Therefore, it is essential to be aware of the potential impact and take action to protect yourself from the negative effects of inflation. By being intentional about budgeting, saving, investing, risk management, retirement planning, tax planning, estate planning and debt management, you can better manage your financial situation and continue to pursue your goals even in an inflationary climate.
It is for this reason, that we schedule an annual meeting with our clients and therefore with you. We discuss your financial plan and look at different financial strategies that can help you deal with inflation and achieve your long-term financial goals. It is, of course, standard part of the service agreement A. If you would like more information about this, please contact your advisor.
