Dollar Scholar Asks: How Can I Prepare My Wallet for Stagflation?
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This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
It may be problematic in hindsight, but you can’t deny that Glee was a cultural reset. “Don’t Stop Believin’” in the pilot? Sue Sylvester’s meme-able “I am going to create a…” line?? A cappella “Teenage Dream” into the Klaine kiss??? Iconic.
In my opinion, one of Glee’s greatest accomplishments was that it triggered a mashup renaissance. We, as a society, remembered how awesome it is to take two or more amazing songs and remix them to create a high-quality banger. From DJ Earworm to Death Cab for Yeezy, mashups took hold of the nation — and still haven’t really let go. (I’m listening to “Levitating” x “Baby One More Time” as I write this.)
Unfortunately, these days, we’ve begun to talk about a much less fun type of mashup: stagflation. And unlike Madeon’s “Pop Culture,” this mashup doesn’t make me want to crank the volume so high my ears hurt — it makes me worried about my wallet.
What causes stagflation?
I called Lauren Anastasio, director of financial advice at investing app Stash, to learn more. She told me that, usually, when inflation is high, unemployment is low. A robust demand for goods and services elevates prices, but it also means that companies have to hire lots of people to meet that demand.
The opposite is also true: When unemployment is high, inflation is usually low. When millions of people get laid off, they can't afford to pay for patio furniture or personal training or a whole host of other goods and services. This lowers demand, which prompts sellers to lower their prices, driving down inflation.
Stagflation is the exception to the rule — the worst of both of the above scenarios. It’s “essentially an economic condition where inflation and unemployment are high, but demand for goods and services is stagnant,” says Anastasio, who is also a certified financial planner. Historically, stagflation has been preceded by a shock to the economy, like when there’s an issue with the supply chain or money supply.
Sound familiar?
Both of those events have occurred recently, leading Anastasio to conclude that we’re staring down “a perfect storm” of factors that could lead to stagflation. While it’s not a foregone conclusion — right now, although inflation is high, unemployment is still low — the components are in place.
Brian Walsh, a CFP and senior manager of financial planning at SoFi, also emphasized that the United States is not in a period of stagflation — yet. But he says SoFi customers, many of whom have been experiencing record-high inflation at the grocery store and reading nonstop headlines about the possibility of a recession, are concerned.
“People are worried about the worst-case scenario. Stagflation is kind of that worst-case scenario because there’s no good way out of [it],” he says.
There's no easy off-ramp from stagflation, he explains, because the normal tools the government would use to lower inflation and increase employment are stymied; they essentially would work against each other. “You’re stuck between a rock and a hard place,” Walsh adds.
For everyday consumers like me, an economic standstill that cools demand could cause businesses to cut back on production, which could trigger layoffs. That chain reaction could weaken the job market, and the implications for millions of Americans are... not good.
“It really puts people in a position where they have to rely more on their savings. They have to make drastic cuts to their spending or potentially go into debt in order to cover living expenses,” Walsh says.
Yikes.
How can I prepare for stagflation?
The good news is that both experts said there are steps I can take to insulate my finances from any potential effects of stagflation. The first is to get my emergency fund up to snuff. Though Anastasio typically recommends I keep three to six months’ worth of essential expenses set aside in cash, I might want to increase that a bit in the face of stagflation because the inflationary part of stagflation means I'll have to pay more to buy what I need.
Next, I should rein in any unnecessary spending. Anastasio suggests taking a step back and looking for opportunities to adjust my cash flow so I have more money coming in than going out. Are there subscriptions I don’t use that I can cancel? Am I eating out a little too often? Can I pick up a side hustle to generate some extra dough?
“It’s an area where you have so much control,” she says. “It’s not just about the little cost savings here and there, it’s more [about] giving you a sense of power over the situation. That’s going to be helpful for your financial anxiety.”
Now is not the time to be adding obligations, either. Anstasio says I should avoid making large financial commitments like upgrading my car, purchasing a Peloton or buying a costly house. If I can postpone those major money moves for a while, it might be a good idea, because I don’t want to give myself even more (inflated) monthly payments to deal with.
Third, I want to get my debt under control ASAP. Walsh says that people with credit card debt may especially suffer in a period of stagflation because persistent inflation will push up the cost of everyday goods... at the same exact time rising interest rates will make carrying balances more expensive.
“Anything with a variable interest rate is going to become more and more expensive and much harder to pay off,” Anastasio adds. “Now is a good time to finally get rid of that obligation.”
Every financial expert has a different theory on the best way to pay off debt, but Walsh is a fan of the snowball method, which works like this: I make minimum payments on all my cards and use any surplus in my budget to pay down the card with the smallest balance. Then, rinse and repeat. Theoretically, paying down my debt gets easier as time goes on because the money that was originally going to pay those smaller debts "snowballs" into a larger amount I have to throw at my bigger balances. (If I don’t have a surplus in my budget, Walsh says I may want to try to consolidate my debt by taking out a personal loan with a low interest rate.)
Once I’ve gotten that all squared away, I might consider putting more money into my investments, Anastasio says. Because the market is down, stocks are essentially on sale — and, over time, the investments I make now will likely grow at a rate that outpaces inflation.
The bottom line
Stagflation is the worst kind of mashup: a combo of stagnant demand, high inflation and high unemployment. We’re not quite there yet, but we might be soon.
To brace myself for stagflation, I should cut back on discretionary spending, get my debt in order and review my investing plan. Most crucially, though, I should take a deep breath. Anastasio warns against becoming overly stressed about stagflation, because that certainly won’t benefit me.
“You want to have a calm head about what you’re doing financially,” she says.
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