Surviving Stagflation

🔍 Deep Dive: Preparing for Possible Stagflation

Whether you’re on “team tariff” or not, economic researchers say the policy has increased “the risk of both higher inflation and lower growth.”

The last time we saw major stagflation was in the 1970s, when unemployment rates and inflation both rose after the Vietnam War.

This led to a rise in oil prices and subsequent fuel shortages at gas stations. A dramatic financial policy was enacted which brought inflation down, but came with increased Fed interest rates.

This prompted a severe recession and a 10%+ unemployment rate.

While it isn’t a guarantee that stagflation will occur, it’s important to understand the risk and be prepared as a consumer.

Here are four things you can do starting today:

1. Build Your Fortress (a.k.a. Emergency Fund)

Having 3-6 months worth of expenses saved up is considered to be standard for an emergency fund. However, this might not be enough if stagflation happens soon.

Increase your emergency fund reserves to 6-12 months worth of essential expenses, and start today. This protects you in several ways:

• Larger safety net if you’re laid off at work. With high unemployment, finding a new job can take more than a few months. It pays to be safe rather than sorry.

• Buffer against rising costs. If the cost of goods and services increase, your emergency fund will need to stretch even further.

• Flexibility. In the event you’re laid off, a larger emergency fund gives you more flexibility in finding a new job and/or negotiating your salary. A smaller emergency fund creates more urgency and gives you less negotiating power.

The peace of mind from knowing you can weather an extended financial storm is invaluable during uncertain times.

2. Reassess Your Spending Priorities

The best time to reduce your spending is before you’re forced to.

Review your spending from the last three months, and look for:

• Subscription services: Ask yourself if there are any you’re not using, or any you can go without. This is a quick way to spot opportunities to cut expenses.

• Dining and entertainment: Americans spend an average of $328 per month eating out. Put a pause on restaurants and bars, and use platforms like Groupon for discounted activities.

• Negotiate recurring bills: It’s often possible to reduce your cell phone, internet, car insurance, or other bills through negotiation. Here’s a YouTube video that explains how to do it.

3. Rethink Your Investment Approach

Stagflation creates a tough environment for investors, and now is definitely not the time to take on unnecessary risk in the market. Stick to broad market index funds like the S&P 500 or Vanguard Total Index.

Attempting to pick individual stocks is a bad idea for the average investor. It’s even difficult for professional traders, and you’re not likely to beat them. Broad market index funds allow you to maintain diversification, and is a much safer option than picking stocks yourself.

4. Protect Your Most Valuable Asset: Your Income

Job security is paramount in tough economic times. If there’s one major thing for you to focus on now, this is it.

The quickest way for any company to cut costs is to reduce headcount. Sometimes there’s nothing you can do to avoid being laid off, but one of the best ways to protect yourself is to make sure you’re going above and beyond at work.

To minimize the chance that you’re part of layoff, you can:

• Become visibly indispensable: Emphasis on visibly. Make sure your contributions are seen by others, and quantifiable.

• Develop new skills: Increase your organizational value by developing new skills you can use to perform a wider variety of tasks at work.

• Expand your professional network: The worst time to network is immediately after a job loss. Maintain your connections now, in case you need them in the near future.

• Create new streams of income: Take the time to supplement your day job income with a new stream of revenue. This could be anything from a part time job to driving for Uber or doing food delivery.

Put it Into Practice

1️⃣ Calculate how many months your current emergency fund would cover if you lost your income.

2️⃣ Create a savings plan on how you can increase this to at least 6 months of essential expenses, or ideally up to 12 months worth of essential expenses.

3️⃣ Identify all non-essential spending categories you can reduce immediately, and redirect that money to your emergency savings.

💵 Budget Breakdown: Chelsey from New Jersey

Chelsey from New Jersey shared her budget, so let’s break it down below.

First, the numbers:

This is a great budget, and here’s why:

• She’s using the zero-based budgeting method. Every dollar “has a job,” so her hard-earned dollars are working hard for her too. This means 100% of her income and expenses are allocated and accounted for.

• The 50/30/20 rule says approximately 50% of your income should go towards your bills and other essential needs. Chelsey is slightly over this rule of thumb - but assuming these aren’t all bimonthly expenses, then I think she’s still doing great.

• She gave herself a reasonable budget for fun and entertainment. The quickest way to burn yourself out on paying off debt is to sacrifice all of your fun spending. It’s okay to have fun every once in awhile, as long as you track it and keep it under control.

Here’s the one change I’d make:

• She appears to be saving in a few sinking funds which is awesome 🙌, but unless those are important short-term savings goals, then I’d consider shifting that to her credit card debt.

🔗 Quick Links

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