Personal Finance

Now that taxes aren’t such a big worry, here’s what’s keeping investors up at night

Key Points
  • Taxes were a leading contributor to the American Institute of CPA’s Financial Pain Index for eight consecutive quarters.
  • In the second quarter of 2018, inflation took over as a top cause of financial pain.
American actress Vera Miles stars as Lila Crane in the horror classic 'Psycho', directed by Alfred Hitchcock, 1960.
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With individual tax rates down, a new boogeyman is haunting investors: inflation worries.

Those were the findings from the American Institute of CPAs' Personal Financial Satisfaction Index, which measures investors' "financial pleasure" or "financial pain" based on a range of economic factors, including personal taxes, inflation, job openings and real home equity.

Overall, the Personal Financial Satisfaction Index has crept up to 27.7 in the second quarter, from 27.0 in the first three months of the year. This reflects increased job openings and strong stock market performance.

However, inflation took the lead as a source of financial "pain," edging out worries about taxes. The AICPA's blended inflation measure in the second quarter was 2.3 percent, up 0.6 percent from the first quarter.

Up until the second quarter, taxes were the leading cause of "pain" for the prior eight quarters.

"Even though inflation has gone up, it's still pretty darn low, relatively speaking," said Michael Eisenberg, a CPA, personal financial specialist and member of the American Institute of CPAs Consumer Financial Education Advocates.

"People get nervous when they see or hear about inflation," he said. "It eats away your purchasing power over time."

Here's what rising inflation means for your finances.

Long-term investing

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Though inflation rises incrementally from one year to the next, the real concern is what it means, long-term, for your ability to pay for goods and services.

It's one of the reasons why a pound of ground beef was $1.80 in June 1998 and why it's now $3.82 as of this June, according to the Bureau of Labor Statistics.

From a financial planning perspective, savers approaching retirement ought to identify the three biggest inflation threats facing them and prepare accordingly, said Thomas Scanlon, a CPA with Borgida & Co. in Manchester, Connecticut.

"My big three are housing, education and medical," he said. "Medical expenses are the runaway train and will affect everyone."

In order to safeguard against inflation in retirement, investors should work with their advisors to reevaluate their allocation toward equities so that they can keep up with rising expenses – particularly the cost of health care.

"You could be in retirement for 30 years if you think about it, so even with benign inflation, you have to invest to protect yourself those last 15 years," said Scanlon.

Short-term worries

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Incremental jumps in inflation may not be worth panicking over now, but investors should still be aware of what this might mean for other costs — credit-card debt, rent and the purchase of goods — particularly if paired with increases in the interest rate, said Eisenberg.

Home in on those rising expenses by building a budget with your financial advisor and sticking to it. This will put the rising cost of living in context with your wages.

"Budgeting is a great way to get people to be more knowledgeable about the expenses they have now and be aware of how they're saving or investing the surplus," said Eisenberg.

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