Money Management

That’s not necessarily a good thing, though. 

Most people are painfully aware that inflation has been a major problem for well over a year now. And since early 2022, many consumers have had to raid their savings accounts and rack up debt on their credit cards just to cover their basic bills, like housing, food, transportation, and utilities.

The good news is that inflation seems to be well past its peak. Last June, the Consumer Price Index (CPI), which tracks changes in the cost of consumer goods and services, measured annual inflation at 9.1%. Since then, the CPI has steadily declined. And as of February, the CPI was up only 6% on an annual basis.

Meanwhile, a Federal Reserve survey conducted in late 2022 had consumers pointing to inflation reaching the 5% point by the end of 2023. Based on the CPI drops we’ve seen thus far and where we’re at today, that estimate is more than reasonable. But 5% inflation also isn’t necessarily something to celebrate.

5% inflation is still very high

The Federal Reserve has been implementing interest rate hikes since early 2022 to combat inflation. And while much progress has been made, the central bank still feels it has work to do.

In fact, consumers should gear up for more interest rate hikes in 2023 given that inflation is still at 6%. And even if inflation hits the 5% mark, the Fed won’t be close to satisfied.

Generally speaking, the Fed likes to see annual inflation at around 2%. It’s this level, the Fed feels, that lends to a strong economy and financial stability for consumers. But since we’re nowhere close to that point — not now, and not at 5% inflation, either — we shouldn’t expect the Fed to back down anytime soon.

Why interest rate hikes are such a problem

The Fed is not tasked with setting consumer interest rates for products like mortgages, auto loans, and credit cards. Rather, those rates are determined individually by lenders and credit card issuers.

But when the Fed raises its federal funds rate, which is the rate that banks charge each other for short-term borrowing, it tends to drive consumer interest rates upward, making it less affordable to borrow. This is intentional, because it will take a notable drop in consumer spending to bring inflation back down toward the 2% mark. But it also lends to a frustrating time for consumers who want or have to borrow money for different reasons, whether it’s to buy a car or fix up an aging home.

In fact, consumers who are able to put off major purchases this year may want to go that route and wait for borrowing rates to come down. Signing a loan now will generally mean paying a lot more for it, and that unfortunately also applies to borrowers whose credit is excellent.

In time, inflation is likely to drop and the Fed is likely to back down on interest rate hikes. But we’re nowhere close to that point. And we won’t be there once inflation gets to 5%, either.

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What shouldn’t you invest in, according to Orman? 

Whether you’re a seasoned investor or just starting to learn about finance, there is one name that stands out in the world of money management: Suze Orman. A highly sought after financial advisor and author, Suze is well known and respected for her sound advice on investing. So it’s no surprise that many people look to her for guidance when deciding where to put their money. But why does she recommend avoiding commodities such as gold?

Gold is speculative investment

In a recent podcast episode, Orman reminded listeners that she had recommended Barrick Gold. The stock, whose ticker symbol is GOLD, was paying a nice dividend and the price was around $18 a share. Since her recommendation, the price of the stock has gone up but she believes there may not be more upside.

Gold was trading at $1,923 per ounce at the time of recording. Resistance is the level at which supply is strong enough to stop the stock from moving higher. Orman stated that gold recently broke through the $1,900 resistance level, but the next resistance level is only at $2,063 an ounce. Since the price of gold is close to the next resistance level, she believes investors should wait and see the price action of gold.

Orman also states that investors should put no more than 5% of their money in commodities like gold, silver, or copper. They should only invest funds that they are also willing to lose because commodities are very speculative. Speculative investments carry an extremely high level of risk. While it also opens the door for a substantial profit, the chances of losing all your money is high.

Investing in commodities is speculative because investors sink considerable sums of money into a gold mine, for example, in hopes that it will pay off. Unfortunately, sometimes the gold extracted may not be enough to yield a positive return.

Gold doesn’t generate income

Warren Buffett is known for his belief that gold should be avoided as an investment because it doesn’t generate income like other investments do. Gold doesn’t produce any income, so you can’t make money from interest or dividends like you would with other investments such as stocks, bonds, and real estate. In fact, if you invest in gold, you may end up losing money due to inflation or changes in the market.

In the 2011 Berkshire Hathaway shareholders letter, Buffett stated that investments like gold “will never produce anything, but…are purchased in the buyer’s hope that someone else — who also know that the assets will be forever unproductive — will pay more for them in the future.”

In addition, commodities like gold are not liquid like cash or other investments. This means that if you need to access your money quickly, it could be difficult to sell your gold at a price close to what you paid for it. And since the value of gold can fluctuate greatly over time, there is always the chance that your investment could be worth much less if the market crashes.

All in all, Suze Orman advises against investing in gold right now. While some believe gold is an important investment that hedges against inflation, it isn’t without its risks. Warren Buffett has also long advocated that investors stay away from gold and invest in companies that generate income or produce something valuable. For most people looking for long-term financial security, both Buffett and Orman recommend traditional investments such as stocks and bonds.

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Your policy might come in really handy at some point. 

Thanks to the Affordable Care Act, health insurance companies generally have to cover enrollees for pre-existing conditions. But pet insurance works differently.

Most of the time, pet insurance policies will not pick up the tab if you’re filing a claim for treatment for an issue your pet had before it became insured. And so if you’re adopting a pet with known issues, or you have a pet with known issues, you may be inclined to skip the pet insurance and save your money.

But actually, it could still very much pay to get pet insurance, even if you know full well that your pet has certain conditions that won’t be covered. That’s because you never know what the future holds. And you don’t want to run into a situation where you’re maxing out your credit cards to pay for your pet’s care.

Protection from major health events

You never know when a pet of yours might get injured, requiring surgery costing thousands of dollars. Similarly, you never know when your pet might be diagnosed with a major illness that costs many thousands of dollars to treat.

That’s why it pays to get pet insurance even if you know full well that it won’t pick up the tab for treatments related to a pre-existing condition your pet has. Your policy might still more than pay for itself if your pet requires surgery or extensive medical treatment that you can’t afford.

Imagine you’re now stuck paying $100 a month for medication for your animal that your pet insurance company won’t pay for. That may be impeding your ability to add to your emergency fund. But what happens if your pet gets hurt and requires a $4,000 surgery? You may not have anywhere close to enough money in savings to cover that. With pet insurance, your policy might pick up the bulk of that tab.

What’s more, your pet might have a manageable condition for now. But what if they’re diagnosed with a disease that costs thousands of dollars to treat? You’d hate to be in the position where you’re forced to choose between your financial security and your pet’s life.

An expense worth working into your budget

The average cost of pet insurance is $44 per month for dogs and $30 a month for cats, based on Forbes Advisor’s analysis. Now, your pet may cost more or less to insure — it depends on the policy you put in place and the insurance company you go with.

But imagine you end up paying $44 a month for your dog’s policy over five years. That’s $2,640 in total. But if your dog ends up falling ill and needing treatment and surgery, your pet insurance company might end up paying out three times that much for your pet’s care.

It’s frustrating that pet insurance companies don’t cover pre-existing conditions the way human health insurers do. But even if that’s the boat you’re in, it could still make sense to buy a policy so you’re protected in more extreme situations.

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Surprisingly, it’s not New York! 

The ultra-rich have a lot of money at their disposal, so it’s no surprise that they tend to invest heavily in real estate. It’s a safe bet, after all — real estate is one of the most reliable and profitable investments available. But where are the ultra-rich buying property? Here are the most expensive neighborhoods in the country, and surprisingly, none are in New York City.

Most expensive neighborhoods

Real estate investor and YouTube personality Graham Stephan states that with the skyrocketing prices of real estate, “it now takes 13 years to save for a down payment on a house in New York. But it’s still not the most expensive.” According to Zillow, out of the 12 most expensive neighborhoods in the U.S., nine are in Florida (six in Miami Beach, two in Naples, one in Jupiter) and three in Beverly Hills, California. Florida is now the choice of the ultra-rich.

Miami Beach

Six of the 12 most expensive neighborhoods are in Miami Beach specifically. This city’s booming tourism industry makes it an attractive option for those who want to invest in properties near beaches or other tourist attractions. And thanks to its vibrant nightlife scene and diverse array of entertainment options, Miami Beach also appeals to those who want to turn their investments into rental properties or vacation homes.

Star Island in Miami Beach is the most expensive neighborhood in the country. It offers extreme exclusivity, unobstructed bay views, private boat docks, and waterfront lots of at least 40,000 square feet each. In December 2019, the average home was $23.5 million, while three years later the average home in Star Island is now $40.2 million, a 71% increase. Star Island Miami Beach only has a few dozen homes, but the man-made island was home to celebrities such as Will Smith, Kanye West, and Shaquille O’Neal.

Ken Griffin, the hedge fund billionaire who runs Citadel, recently purchased five properties on the island for a combined $194 million. This pushed Star Island to become the priciest neighborhood. It’s four times more expensive than Beverly Hills Gateway in Beverly Hills, California and more than twice as expensive as the second-priciest neighborhood in the country — the Port Royal section of Naples, Florida.

According to the Zillow report, here are the 12 most expensive neighborhoods as of December 2022.

Real estate investments can be both lucrative and rewarding if done correctly — and that holds especially true if you’re among the ultra-rich set on investing your money wisely. From Miami Beach’s sun and sand to Los Angeles’ luxurious lifestyle offerings, these neighborhoods each offer unique advantages when it comes to real estate investments. These are just a few areas that could give you the chance to invest your money like an ultra-rich person!

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A small yearly change makes a huge difference. 

One of the most valuable financial habits is investing consistently. First, you decide on an amount to invest that works for you, such as 10% of your income. Then, you set up an investing schedule, such as every two weeks or once per month. Some online stock brokers even let you automate this. Stick to this plan, and you’ll be steadily building wealth.

This is a great start, and if you invest enough, it could have you on track for retirement. But you can also take it a step further by increasing your rate of investment every year. How much should you aim for? One popular financial guru has the answer.

How much to increase your rate of investment each year

Personal finance guru Ramit Sethi, author of I Will Teach You To Be Rich, gives a lot of simple and effective investing advice. His standard recommendation is that you invest 10% of your take-home pay (you can also use your total income if you prefer). But he also recently shared one of the ways you can do even better and score a big money win — increase your investment rate by 1% every year.

For example, if you’ve been investing 5% of your income, invest 6% this year. Next year, raise it to 7%, and then 8%, and so on.

The reason this works so well is that it doesn’t require big changes on your part. Let’s say you make $60,000 per year. To increase your investment rate by 1%, you invest another $600 per year, which is only $50 per month. Finding that extra cash probably won’t be too challenging.

You can implement this rule whether you’re currently investing 10% of your income like Sethi suggests or not. If you’re not able to afford 10% yet, these gradual increases are a good way to get there. And if you’re already investing 10%, then this strategy will have you putting away even more.

Where to invest your money

As you invest more, you may need to diversify your investment accounts, especially if you earn a high income. Retirement accounts have contribution limits that you could run into. Here are the current limits for 401(k)s and individual retirement accounts (IRAs):

The annual 401(k) contribution limit in 2023 is $22,500 if you’re under 50 and $30,000 if you’re 50 or older.The annual IRA contribution limit in 2023 is $6,500 if you’re under 50 and $7,500 if you’re 50 or older.

In both cases, the limit applies to combined contributions for traditional and Roth accounts. Let’s say you’re under 50, and you have an IRA and a Roth IRA. You can contribute up to $6,500 combined to those accounts in 2023. That could be $3,000 in one and $3,500 in the other. But you can’t put $6,500 in each.

If you have a 401(k) and your employer offers to match your contributions up to a certain amount, make sure to max out that match. After that, divide your investments up as you’d like among your 401(k) and any IRAs you have. If you end up maxing out all your retirement account options and still have money left over, then you can open an individual brokerage account.

Adjust your investment rate as needed

Sethi’s recommendations for investing are sound and will work well for just about anyone. However, you’ll need to find the investment rate that fits your financial situation and goals.

For example, if you have plenty of money to spare, you might want to increase your investment rate by more than 1% per year. That’s fantastic. There’s nothing wrong with jumping from 10% to 15% or even 20%, if you can do that without issue. Big changes like these are harder to keep, but they can work, especially if you’ve increased your income.

There might also be times when you need to dial back on investing. If your income drops or your bills increase, that could require you to lower your investment rate. Aiming to invest 10% of your income and increase this by 1% per year are both good goals, but feel free to adjust them as needed.

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It’s actually good news. 

It’s hardly a secret that inflation has been hurting consumers for well over a year. And at this point, a lot of people have racked up credit card debt simply to do things like put food on the table.

The Federal Reserve wants to put an end to rampant inflation. And so last year, it raised interest rates seven times to achieve that goal.

But we’re not done with soaring inflation. In February, the Consumer Price Index was up 6% on an annual basis. Meanwhile, the Fed has made it clear that its goal is to bring inflation down to the 2% mark, which it considers a healthy level that lends to economic stability. And so we’re likely to see more interest rate hikes this year until the pace of inflation cools further.

That may not be the best news from a borrowing perspective. But it’s great news for people with money in savings accounts.

Savers could gain even more

It’s become very expensive to borrow in the form of auto loans, personal loans, and just about any type of loan following the Fed’s rate hikes in 2022. And we’re probably going to see more of those hikes this year.

The purpose of rate hikes is to discourage consumers from spending to some degree. Once that happens, it can close the gap between supply and demand that causes inflation to surge.

But while rate hikes aren’t good for borrowers, they’re terrific for savers. In the wake of last year’s rate hikes, banks have started offering much more attractive savings account and CD rates. And so now, consumers who keep money in the bank are earning more interest than they were a year ago. If more rate hikes happen this year, savers could come out ahead financially even more.

Will the Fed slow down on rate hikes?

Inflation has cooled quite a bit since peaking in mid-2022, so in the coming months, the Fed may not implement the same sort of aggressive interest rate hikes it did last year. Rather, we could be in line for modest rate hikes — though only time will tell.

But either way, consumers should expect the cost of borrowing to continue to rise. The silver lining is that those with money in savings could benefit financially.

Higher savings account rates could also make it easier for consumers to cope with inflation. That’s because their interest earnings might be substantial enough to cover some of their bills while they wait for living costs to come down.

How to eke out the best savings account rate

One big misconception about the Federal Reserve is that it tells individual banks what amount of interest to pay. Rather, the Fed oversees the federal funds rate, which is the rate banks charge each other to borrow money on a short-term basis.

Because banks set their own interest rates, consumers who want to score the highest rates should do their research and shop around. This applies to savings account rates as well as CD rates.

Within the realm of CDs, it’s also important to look at different terms. It may be that one bank has the best rate for a 12-month CD while another has the best rate for a 6-month CD. These are the sort of details savers should look at carefully.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
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