Nov 8, 2023
Rampant inflation has cooled off significantly in America over the past year, and the Federal Reserve has kept its key rate steady for two consecutive meetings. But if you think now is the time to upgrade your lifestyle, “Shark Tank” star and investor Kevin O’Leary has a wake-up call.
“We're looking at a downsized America,” he said in a November interview with Fox Business. “Three years ago, even 24 months ago, you'd get a mortgage at 4.5%. You're lucky to get one at 8% today.”
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But the impact of high rates extends beyond the housing market.
Edmunds reports that borrowing rates for new vehicles in the third quarter of 2023 hit an average of 7.4%, a figure not seen since 2007.
O’Leary summed it up by saying that if you are in your early 20s, your lifestyle will be “about 20% less.”
The blunt reality is that while the headline inflation figure is no longer at 40-year highs, price levels remain elevated. In September, the U.S. consumer price index rose 3.7% from a year ago.
Since the U.S. central bank is committed to using monetary policy to bring inflation down to 2% over time, O’Leary believes more rate hikes could be on the way.
Despite this intimidating financial climate, you’re not totally in the dog house so long as you adjust your finances accordingly. Here is how you can do just that:
'Hot political potato'
In September, the U.S. consumer price index rose 3.7% from a year ago.
“People are looking at the cost of energy, protein, car loans, mortgages,” O’Leary said. “These are complicated situations because of the rate hikes that happened so quickly. But there's no question inflation is not going down — it's north of 3.5%.”
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Since the U.S. central bank is committed to using monetary policy to bring inflation down to 2% over time, O’Leary believes more rate hikes could be on the way.
“The Fed may have to increase rates another 25 or 50 basis points as early as January, February. It will be a very hot political potato and it's going to become an issue because it hits you every day at the pump and hits you every day at the grocery store,” O’Leary said, adding that inflation has been “hurting presidential runs on both sides of the aisle” for decades.
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Fighting inflation
In times of rising prices, consumers might want to prioritize essential expenditures and limit discretionary spending by focusing on necessities such as food, housing and health care.
As O’Leary indicated, you may have to downsize — particularly for items that require borrowing money.
Another adjustment involves budgeting more meticulously and tracking expenses closely to identify areas where cuts can be made. For instance, if you think you are paying too much for your home or auto insurance policy, you might want to compare insurance and save up to $500 a year.
Investing in inflation-resistant assets can be another way to safeguard purchasing power. For instance, investing in real estate is a popular strategy to hedge against inflation. As the price of raw materials and labor goes up, new properties are more expensive to build, and that drives up the price of existing real estate.
Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income. Although obtaining a mortgage might entail paying high interest rates, these days, you have a variety of options to invest in real estate without buying a house.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
