Financial Planning is a math-based activity. Investing is a cornerstone of your financial plan, and factual numbers & measurements play a large role in investing, for example – calculating the “yield” on a bond or understanding the earnings of a company in the S&P 500.
Between inflation, shifting interest rates, and concerns over long-term stability, it’s no wonder many of us feel overwhelmed. But here’s the thing: gaining clarity and making informed financial decisions is possible—especially with a little context and some practical guidance meets “the numbers”. The numbers generally fall into one of two categories: Known & Unknown. We know what the most recent inflation reading is…but we don’t know inflation will be next year.
With this in mind, let’s take a step back, break down the current economic climate, and explore how to make sense of it all in your financial planning.
The Economy: Fairly Strong
For anyone watching the news or experiencing a layoff, it might feel like the economy is on shaky ground. But when you peel back the layers and look at key indicators, the story is far less bleak.
- Gross Domestic Product (GDP): Currently growing at 2.7%. This steady growth signals a generally healthy economy, as GDP measures the total value of goods and services in the US..
- Unemployment: At 4.1%, it remains significantly below the 50-year average of 6.2%, even with recent layoffs in some sectors.
- Wage Growth: At 3.9%, wage growth is currently keeping pace with inflation and aligns with historical trends.
- Inflation: The Consumer Price Index (CPI) sits at 2.4%, right in line with long-term averages and a far cry from the spikes of the last couple of years.
Taken together, these figures paint a picture of a fairly strong, resilient economy. However, it’s important to acknowledge that these averages don’t reflect everyone’s experience. Millions of American families still struggle to navigate rising costs and many are one car repair away from an empty bank account..
Federal Finances: The Broken Math
Now let’s talk about the federal deficit—projected to hit $1.9 trillion this year. This number reflects the gap between what the government spends (roughly $7 trillion) and what it collects in taxes (closer to $5 trillion). This is the by-product of the most forgiving set of Federal Tax Brackets since World War….and all-time high government spending.
Something has to give, right?
Here’s the reality: the United States still remains the financial center of the global economy. Over half of the world’s reserves and trade transactions are conducted in U.S. dollars, and the U.S. Treasury market is the deepest and most stable in the world. While the deficit isn’t ideal, the economy isn’t crumbling tomorrow. As long as GDP continues to grow, the system can function, albeit imperfectly.
As Bill Gross, former PIMCO bond manager, used to say: “The U.S. is The Cleanest Dirty Shirt.”
What does this mean for you? Stay informed, but don’t lose sleep over issues beyond your control. Instead, focus on optimizing your personal finances.
Social Security: A Pillar That Is Unlikely To Go Away
One common question clients ask is, What happens if Social Security disappears? The short answer? It won’t.
With over 70 million Americans relying on it, eliminating Social Security isn’t politically feasible. However, adjustments—like smaller cost-of-living increases or higher taxes for upper-income earners—may be on the horizon. For financial planning purposes, Social Security remains an important consideration, though it shouldn’t be the sole pillar of your retirement strategy.
Inflation and Interest Rates: Adjusting to a New Normal
It’s no secret that prices have risen across the board. From groceries to housing, inflation has become a daily reality. However, the current inflation rate 2.4% (as of November 2024) is not only manageable but necessary for a healthy economy. Controlled inflation helps offset national debt and prevents deflation – which would spell disaster for economic growth.
Interest rates are settling into a new normal. Mortgage rates hovering between 6-8% may feel high compared to the artificially low rates of the 2010s, but historically, they’re closer to average. While today’s rates may feel like a burden, they represent a return to normality in borrowing costs rather than artificially low rates brought on by a crisis.
For individuals, this means adjusting expectations. Budget for higher costs, seek value where you can, and plan for a financial environment where prices likely won’t fall back to previous lows.
Why Investing Still Makes Sense
Despite economic challenges, the U.S. remains a hub of innovation. Companies like Apple, Microsoft, and Alphabet lead the way globally, and countless startups emerge daily to drive the next wave of growth. Meanwhile, the road ahead may be a business environment which supports merger, acquisition & consolidation activity. All of the above may provide opportunities to grow wealth over the long term.
Also – in order for buying power to keep up with inflation, your cash ideally needs a return which beats the inflation rate.
That said, investing requires discipline, strategy, and a clear understanding of risk. Here are a few guiding principles:
- Define Your Goals: Are you saving for retirement, funding college tuition, or building a safety net? Your objectives will shape your investment strategy.
- Assess Your Risk Tolerance: How comfortable are you with market volatility or the risk of permanent capital loss? Understanding your risk tolerance ensures your portfolio aligns with your temperament and needs.
- Stay Balanced: Diversify across different types of investments (from growth oriented investments to value opportunities to income oriented strategies) to reduce risk while maintaining potential for growth.
Investing is not about reacting to headlines or timing the market. It’s about creating a thoughtful, long-term plan and sticking to it.
Building a Financial Plan: Your Roadmap to Success
Effective financial planning starts with understanding where you are and where you want to go. At its core, it’s about balancing short-term decisions with long-term goals.
Think of it this way: financial planning is like plotting a hike. You know the destination, but there will be unexpected detours, challenges, and opportunities along the way. A solid plan acts as your map, helping you stay on course while adjusting for new realities.
Here are the key steps:
- Analyze Your Situation: Take stock of your income, expenses, savings, and investments.
- Set Clear Goals: Establish milestones for retirement, major purchases, or other priorities.
- Develop a Strategy: Create a roadmap that aligns your resources with your objectives.
- Review and Adjust Regularly: Life changes—your plan should too.
A Reality Check and a Reason for Optimism
Money is emotional. Layered on top of that…most media is designed to spur emotions. End result – sometimes it is hard to feel good about our economy or your own personal finances – even when our goals are achievable.
As you navigate today’s financial challenges, stay focused on what you can control. Build a plan, remain disciplined, and trust that resilience and innovation will continue to drive progress. If you ever feel overwhelmed, remember: It’s not about perfection – It’s about persistence.
