It’s no secret that the past four years have not been the most financially rewarding for a majority of Americans. Since resilience is a hallmark of our population, we are expecting a 2025 resurgence of optimism, with improving personal finances.
Investors have enjoyed a strong run-up in the stock market, likely based in optimism before the election. Now, stock valuations are pricey, interest rates are stubbornly high, and inflation remains a problem. Trump’s energy policies are designed to bring prices down dramatically. That alone cannot quench the inflationary fire, but it should serve as a launching pad for businesses and industries to improve their cost structures.
Other factors may also be contributing to reduced escalation in the cost of living. Commodity prices remain under pressure to go lower, and are not currently contributing much to the inflationary cycle. Labor rates have been rising, but at a much slower pace in the past year. Productivity has been rising at a solid pace, partially offsetting the effects of increasing labor rates. Taxes are now extremely unlikely to be raised on businesses and consumers in 2025. All these factors bode well for a continued lessening of inflationary prices.
COLAs (Cost of Living Adjustments) for Social Security Benefits are lower than we’ve experienced these past few years. Again, this will reduce excess demands on the economy from recent elevated government spending after COVID-19. Unfortunately, the lower COLA will be a drag on personal saving.
Economist Milton Friedman taught all of us (well, at least those who would listen) that inflation is, and will always be, a monetary phenomenon. Too much money chasing too few goods and services results in rising prices. Excessive government spending, without corresponding increases in output, is one of the primary driving forces of inflation. If the new Administration is successful in reducing government outlays, we will all benefit from stabilizing prices.
On an overall basis, the economy looks poised to enter a time of prosperity. Each of us needs to determine how we can best benefit from coming good times. For many, a good first step would be to reduce, and then eradicate, credit card debt. Several approaches to debt reduction are popularized in the media, and whichever method you choose, aim to eliminate these high-interest problems.
People with 401(k) accounts should increase their contributions as much as possible. We are fans of the strategy whereby any salary increases are directed into 401(k) accounts. Out of sight, out of mind.
IRA owners should max out 2024 deposits, if possible, before April 15, followed by making 2025 deposits. Personal savings have never been more important for a comfortable retirement.
Finally, consider working with a qualified, independent, financial advisor.
Van Wie Financial is fee-only. For a reason.
