Your Money: Affordability, inflation and your financial plan

Inflation has been dominating the headlines. But what most people are actually feeling in their daily lives is something different: affordability pressure.

There’s an important distinction. Inflation measures the rate at which prices are rising. Affordability, on the other hand, reflects whether your income can keep up with the level of those prices. And even as inflation has cooled from its recent peaks, the reality is that many costs have reset higher and stayed there.

That’s why things may still feel tight. Over the past five years, consumer prices have risen more than 20%, according to the Bureau of Labor Statistics. Even in the past year, prices rose about 3.3%, while real wages increased just 0.2%. For many households, incomes are still playing catch-up.

This gap is where affordability pressure lives and it shows up in everyday life.

Affordability and your pocketbook

Housing is often the biggest factor. Roughly one-third of U.S. households are considered “cost-burdened,” meaning they spend more than 30% of their income on housing, according to the U.S. Department of Housing and Urban Development. Add in higher mortgage rates that have more than doubled since their pandemic lows, and the pressure becomes even more pronounced.

It doesn’t stop there. Insurance premiums have climbed. Grocery bills remain elevated. Interest rates on credit cards and auto loans are significantly higher. And many people are still anchoring to what things used to cost, which makes today’s environment feel even more uncomfortable.

In short, affordability stress shows up in your monthly cash flow, not just on paper.

Inflation and your portfolio

Inflation doesn’t impact all investments equally. Cash, while stable in nominal terms, tends to lose purchasing power over time. Longer-term bonds can be sensitive to rising interest rates. Stocks, especially companies with pricing power, may be better positioned to adapt. Real assets like real estate or infrastructure can also provide a degree of inflation resilience.

The takeaway isn’t to overhaul your portfolio every time an economic indicator changes. It’s to build a resilient, all-weather strategy that potentially can outlast it. Maintaining appropriate equity exposure, diversifying across asset types, and managing interest rate sensitivity are all part of that process.

Planning considerations in the current environment

A strong financial plan anticipates how higher costs affect your life. That means shifting the focus from net worth to cash flow. Can your plan absorb higher recurring expenses? Do you have enough flexibility to adjust spending if needed? Are you managing taxes in a way that preserves after-tax income?

Thinking about moving? Keep these realities in mind

For some households, the most powerful affordability lever is changing the cost structure entirely. That’s why many Americans are now considering moves from higher-cost to lower-cost states. Lower housing costs, reduced taxes, and a generally lower cost of living can improve cash flow and reduce the pressure on a financial plan, especially in retirement.

But a move isn’t a guaranteed win.

Transaction costs alone, related to selling a home, buying another and relocating, can take years to recover. Tax differences aren’t always straightforward; lower income taxes may be offset by higher property taxes or insurance costs. Healthcare access and quality vary by region. And lifestyle factors, like proximity to family or community ties, can be just as important as financial ones.

A move that may look good on paper still has to work in real life.

Practical steps you can take now

You don’t need to make dramatic changes to respond to this environment. But making thoughtful, small adjustments can make a difference.

Consider locking in fixed costs where possible, especially when it comes to debt. Review variable expenses, including insurance and subscriptions. Maintain a healthy emergency reserve to absorb unexpected increases. And focus on after-tax income, not just what you earn on paper.

If your plan is solid, you shouldn’t need to overhaul it; you just need to make smart adjustments.

Inflation tells you what is happening in the economy. Affordability tells you what’s happening in your life. And while prices may not be rising as quickly as they were, they’re still higher than they used to be. A well-constructed financial plan accounts for that reality, builds in flexibility, and helps you stay ahead of your cost of living over time.

You may not be able to control inflation, but you can control how prepared your plan is for it.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Advisory services offered through Wealth Enhancement Advisory Services LLC, a registered investment adviser and affiliate of Wealth Enhancement Group.