*Please see footnote below for a CORRECTION to last week’s edition, TGIF 2 Minutes – Tax & 401k Infor for ALL Ages. Thank you to my astute readers!
On to this week’s edition:
So far, 2023 has been a decent year, even slightly better than decent, for the stock market and the short-term end of the bond market (total return).
When times are mostly good it becomes easier to feel comfortable spending more money or making major purchases. BUT –
- as we are still in a fairly dire inflationary environment,
- with longer-term consumer price effects still to be seen (up or down, but most likely UP)
- and following over 12 months of Federal Reserve interest rate increases,
currently it makes sense to thoroughly think through – and take more time (perhaps a couple of years) – making major spending decisions.
First, a quick note on inflation: economics textbooks contain facts and theories on “transitory”, meaning shorter-term, inflation versus “entrenched” inflation. Entrenched inflation is more sticky and means “prices would not come back down, and that the new prices… in the market would be a more permanent fixture in the economic life of Americans”.** Currently we are experiencing the most entrenched inflation since the 1970’s, if not ever. Economic data indicates consumers have come to believe that prices will continue to rise and therefore are spending ever greater amounts, with barely a thought. This situation is defined as serious in economic terms.
A quick note on interest rates: although much higher than 18 months ago, interest rates as set by the Fed are more normal, historically speaking, (and higher) than in over 13 years. Economic theory and reality say economies and consumers do not automatically adjust to higher interest rates. It has also been said that interest rate changes by the Federal Reserve typically take two years to filter through the economy. We are currently barely through Year One.
Back to major spending decisions. Although it can be a heartbreaking reality to push further out in time certain spending goals or dreams, with current entrenched inflation and “bouncing back” stock markets there are plenty of reasons for a prudent spending pause. This reality becomes all the more critical when a current spending decision is a “stretch”, meaning going into debt (at today’s high interest rates) or increasing spending beyond already stretched limits.
All is not lost! There is still time and there are methods to saving for goals in the 18- to 36-month timeframe. AND – every dollar that is saved today, at attractive current short-term interest rates, can grow generously over time. Current short-term FDIC-insured and US Treasury interest rates are well over 5%. Money markets (many of which are NOT FDIC insured) are also over 5%. Investing cash savings today for one- and two-year periods can be extremely effective for a short- or intermediate-term savings plan.
Few people want to tell themselves “No” to goals and dreams. But it doesn’t have to be “No”, but rather “Not yet” (with far less, if any, debt).
*CORRECTION to typo: 401k limits for 2023 are $22,500 (not $20,500). For those age 50 and older, the total was stated correctly at $30,000, including the $7,500 catch-up contribution limit. In addition, CORRECTION to tax treatment of 2024 catch-up contribution: the IRS announced last Friday that catch-up 401k contributions can still be made either pre-tax OR after-tax Roth through end 2025.
**Q.ai, Powering A Personal Wealth Movement; Forbes. Nov. 12, 2022.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.