212- The Four Coming Obstacles to Your Financial Success
Our government is undergoing broad change with the introduction of new entitlement programs with a simultaneous flood of cash injected into our economy. These fiscal actions, along with the monetary actions taken by the Federal Reserve Bank, will have a significant impact and will directly influence your future financial success. I think these efforts are creating four major obstacles to your future financial security that you will need to overcome. Let’s look at each.
As new government programs are passed, they must be funded by either deficit spending or through new or increased taxes. To me over the next few years you will likely see a significant increase in taxes of all types to fund this large increase in projected government spending or to offset revenue shortages at the state and local government levels. You will likely see across the board increases in income, capital gains, estate, property and use taxes with many of the increases targeted at higher income and asset households.
If you are lucky enough to be in the higher income or asset levels, you will face a significant challenge to plan your affairs with the objective to minimize the impact of these higher taxes. My view is that minimizing taxes will become a more important objective for all consumers. After all, at the end of the day, it is after-tax cash flow that is most important for us all.
You may have read of recent statements from Warren Buffet and other top investors reporting the large increases in prices their businesses are experiencing. In my view, the recent flood of stimulus cash and pandemic cash savings entering the economy is starting to trigger inflationary increases in the cost of goods and services. Most young adults have not seen the ravages of inflation as they have lived in a benign period of inflation. For Baby Boomers, this upcoming bout of inflation will bring back the 1970’s and how they had to deal with significant price increases for a broad array of things they needed to buy.
For those of you not familiar with inflation, let’s first look at what it is? According to Investopedia, inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
Today we are seeing significant prices increases for food, new homes and lumber. I was reading that the cost of building a new home may be at least $30,000 higher because of lumber price increases alone. What we are seeing is Americans flush with cash all looking to buy similar items, creating shortages and driving up prices. The Federal Reserve has stated these large increases are transitory/temporary and will subside. Other economists and financial professionals don’t agree. For you, you may need to pay significantly more (e.g., 10%) for your living costs without your income increasing as much. This is what happens with inflation. You experience a squeeze between your income and expenses. This causes you to have to save less to make ends meet. The impact of inflation can play havoc with your savings plan.
Possible Lifestyle Creep
During the pandemic many households have increased their available cash savings as they have received stimulus checks and reduced their spending levels. At the same time, expense choices have changed resulting in households better managing their debt and cash outlays. These actions have resulted in a large increase in available cash for spending. The trade-off these households face is whether to increase their spending levels or to save the excess cash they have accumulated by adopting a less expensive lifestyle. I believe that given lower projected future returns on savings that the accumulated savings should remain just that. Put the cash away for the future. However, this decision will need to be made by each household.
One result of the pandemic is that households are voluntarily reevaluating their jobs, while others have been forced to seek a new profession as their jobs were eliminated or were slow to return. This high level of employment disruption is likely to continue as we see new technologies implemented. I have written about this in my books, but I have been surprised at how quickly the changes are taking place. How your household plans for or addresses unplanned employment changes is a significant challenge to address.
Over the next several years, you are likely to see tax increases, larger rates of inflation, the potential for lifestyle creep and the possible disruption of your work situation. To effectively address these challenges, you need a financial plan in place, a fully funded emergency fund and a skill set that will allow you to generate an acceptable level of income. Taking these basic actions should allow you to navigate changes in our economy and to achieve financial success.
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