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  • Writer's picturePhysicians Financial Design

Inflation: An Economic Pandemic

Warren Buffett said earlier this year that inflation “swindles almost everybody.” As a physician, you’ve probably felt the pinch of higher prices like everybody else but may feel in the dark about how this might affect your current and future finances. To help, here is a spark notes version of current economic trends and what it could mean for your long-term financial plan. In this article, we’ll provide some updates and give some tips on making the best of what has become a shaky economic situation. The hot topics on any financial news show these days are the fight against inflation, the ongoing stock market decline, and the economic outlook as we begin to wrap up 2022. Here’s how they might affect you and the complex financial situations that persist with many physicians.


How Did We Get Here?

I always laugh a little inside my head when I hear these long-ranging economic forecasts from the talking heads on tv. It’s funny because I know a majority of their predictions won’t come to fruition regardless of how well-supported their arguments may be. That said, their low predictive success rate would probably blow mine out of the water if I were ever bold enough to make any kind of forecasts of my own. Regardless, check out this article from December 2021 that shows just how wrong (so far) the economic forecasts have been for 2022. The prevailing issues that the forecasts didn’t anticipate were the underlying driving forces of “sticky” inflation: The war in Ukraine (and its effect on the price of energy), the escalating cost of labor (due to Covid-related labor shortages), the escalating cost of housing (due to historically low interest rates), and Covid-related supply chain issues. Couple these factors with a previously red-hot stock market, and we found ourselves in a corrective environment that drove stock and bond prices down simultaneously. But why is inflation having such a negative effect on the economic outlook?


The Inflation Conflagration

Source: Google Finance


As you can obviously see from the chart of the NASDAQ Composite Index, inflation has not been good for stocks this year. I might argue that inflation itself isn’t the main force applying downward pressure, but it’s really the reactive policy that is bad for the markets. What we’ve experienced thus far in 2022 is the realization that inflation is not “transitory” and is probably going to be around for a while. However, the Federal Reserve (more specifically, the Federal Open Market Committee [FOMC] of the Federal Reserve who is responsible for setting monetary policy) did not begin to raise interest rates until inflation had already been prevalent for some time. Many experts believe this was a mistake because of the lag that it takes for monetary policy changes to influence economic activity. Many experts argue that monetary policy changes take at least 6 months to have any effect and I’ve seen some claim that it could take up to two years. Whatever the timeline, we know that the Fed’s basic goal is to slow down demand by raising rates and making it more expensive to borrow.


Well, that might sound like a lot of sophisticated jargon for somebody who is probably just wondering why any of this is important, so let’s break it down. How exactly does this evil inflation thing affect your personal economy? The simplest response is that everything is going to be more expensive, which means the money you have now or will earn in the future won’t buy as much as it could have in the past. As you know, things have always been getting more expensive slowly over time, but those price increases have generally kept up with wage increases, which make the rising prices more palatable. In this recent stretch, wages have grown significantly, but have still not kept up with inflation.


With this in mind, the next logical question seems to be: How do we fight back against inflation? Personally, I always like to look back at historical scenarios to search for clues about what kind of playbook will work in a similar situation. Like how a good coach will watch the film of past games to get a bead on their opponent. Many people have begun to look back at the Great Recession of 2008 because that is the most recent major recession, but I prefer to zero in on the high inflationary era of the late 1970s and early 1980s. During this period, we saw inflation climb to well over 10% and stay there for some time. We saw mortgage interest rates climb to around 20%! And many of the same factors then (rising oil prices, government spending, rising labor costs, etc.) are present in the equation today. So if we continue to trend in the direction of what’s often called a lost decade, how can you fight back during this time that should be your chance to establish your financial foundation?


In my opinion, there are two major implications for young physicians. The first is obvious: the money coming in simply won’t go as far as you thought. And this is true for any stage of the journey, whether a med student, resident, or attending. I think a disciplined approach combined with rethinking your budget and spending priorities is really the only solution to this immediate problem. And eventually, this will pay off.


The second major implication is a little more nuanced. As we transition out of an era of historically low interest rates, the “pay off debt or invest” question may also go through a strategy change. As they say, “cash is king” when inflation is high (like we saw in the 1980s) because as the cost to borrow increases, the less desirable it becomes to pay with credit and the more desirable it will be to pay cash for an item (or to not buy it at all). Think of it this way, if you bought a home in 2021 with a $500,000 mortgage at a 3.0% interest rate, your monthly payment would probably be around $2,100. However, in the current environment a mere 12 months later, that same loan would probably carry a 7.0% interest rate and the monthly payment would now be about $3,300/month – more than 50% higher! The seller of the home didn’t make any more money, but the buyer must pay a lot more to get the same house. This will drive a lot of buyers out of the market, especially if they currently have a mortgage with a lower interest rate. Student debts that carry low interest rates would work in the same way. If you were able to finance or refinance your loans at a much lower rate than what would be available today, it may change the equation on whether it’s a good idea to chunk money at that debt or to put those resources to use somewhere else. If you wonder whether your current strategy may be suboptimal, just click on the big yellow button at the bottom of this article to get your FREE FINANCIAL EVALUATION and student debt analysis.


Key Takeaways

First, the US consumer has consistently shown over the years that they will keep on spending money until they run out – and then they try to adjust their lifestyle. I would suggest making that adjustment now. If inflation continues to run rampant and our lifestyles continue to get pinched, it will be a lot easier to make the adjustment slowly than to wait until after you’ve drained all our resources trying to keep your lifestyle as robust as possible. If you can get to the point where your lifestyle runs well below your income, you won’t feel the squeeze quite as much if our country’s economic condition continues to deteriorate. And please don’t consider this a forecast of any kind (I’ve already admitted that my track record would not be good if I was in the business of long-term forecasting), but I do know that recessions and economic downturns are a part of the normal economic cycle. Being prepared for them is an essential part of a financial plan.


Next, as things continue to change within our economy, be prepared to change your way of thinking or reevaluate where the opportunities lie. During the years when rates were high, it became a popular strategy to chunk off debt as quickly as possible before starting to invest. However, over the past decade, we’ve seen a movement towards investing first because rates are low. During this new era of rising rates, we may need to reevaluate once again to make sure your strategy matches something (1) you are comfortable with and (2) makes sense financially.


Finally, remember that doctors have a tremendously different financial path than almost any other profession. The advisor that you choose to work with should understand those nuances and have experience working with physicians. What you find on Google often won’t apply to your situation, so be sure to reach out to an expert to help you walk the path that you were destined to traverse.



Thanks for reading! For more articles geared toward young physicians and their money, click here or check out The Money Malpractice Podcast on any of the major platforms.


Until next time…KEEP SAVING LIVES AND KEEP SAVING MONEY!



Disclosures

• RichMark Private Wealth Management. LLC is registered as an investment adviser with the State of Michigan, and only transacts business in states where it is properly registered, or is excluded or exempted from such requirements.

• Content should not be viewed at personalized investment advice. Market events and other factors may affect the reliability of the potential outcomes. Simulated growth is purely hypothetical and does not represent actual performance.

• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio.


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