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Are you saving for retirement? For your children’s education? For any other long-term goal? If so, you’ll want to know how inflation can impact your savings. Inflation is the increase in the price of products over time. Inflation rates have fluctuated over the years. Sometimes inflation runs high, and other times it is hardly noticeable. The short-term changes aren’t the real issue. The real issue is the effect of long-term inflation.

Over the long term, inflation erodes the purchasing power of your income and wealth. This means that even as you save and invest, your accumulated wealth buys less and less, just with the mere passage of time. And those who put off saving and investing are impacted even more.

The effects of inflation can’t be denied — yet there are ways to fight them. You should own at least some investments whose potential return exceeds the inflation rate. A portfolio that earns two percent when inflation is three percent actually loses purchasing power each year. Though past performance is no guarantee of future results, stocks historically have provided higher long-term total returns than cash alternatives or bonds. However, that potential for higher returns comes with greater risk of volatility and potential for loss. You can lose part or all of the money you invest in a stock. Because of that volatility, stock investments may not be appropriate for money you count on to be available in the short term. You’ll need to think about whether you have the financial and emotional ability to ride out those ups and downs as you pursue higher returns.

Bonds can also help, but since 1926 their inflation-adjusted return has been less than that of stocks. Treasury Inflation Protected Securities (TIPS), which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, are indexed so that your return should keep pace with inflation. The principal is automatically adjusted every six months to reflect increases or decreases in the Consumer Price Index; as long as you hold a TIPS to maturity, you will receive the greater of the original or inflation-adjusted principal. Unless you own TIPs in a tax-deferred account, you must pay federal income tax on the income plus any increase in principal, even though you won’t receive any accrued principal until the bond matures. When interest rates rise, the value of existing bonds will typically fall on the secondary market. However, changing rates and secondary-market values should not affect the principal of bonds held to maturity.

Diversifying your portfolio — spending your assets across a variety of investments that may respond differently to market conditions — is one way to help manage inflation risk. However, diversification does not guarantee a profit or protect against a loss; it is a method used to help manage investment risk.

All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment will be worth what you paid for it when you sell.

Is a Home Equity Loan or Line of Credit Right for Me?

Home equity financing uses the equity in your home to secure a loan. For this reason, lenders typically offer better interest rates for this type of financing than they do for other, unsecured types of personal loans.

The Tax Cuts and Jobs Act of 2017, enacted December 22, suspended from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

A home equity loan (often referred to as a second mortgage) is a loan for a fixed amount of money that must be repaid over a fixed term. Generally, a home equity loan:

• Advances the full amount you borrow at the beginning of the loan’s term.
• Carries a fixed rate of interest.
• Requires equal monthly payments that repay the loan (including the interest) in full over the specified term.

With a home equity line of credit (HELOC), you’re approved for revolving credit up to a certain limit. Within the parameters of the loan agreement, you borrow (and pay for) only what you need, only when you need it. Generally, a HELOC:

• Allows you to write a check or use a credit card against the available balance during a fixed time period known as the borrowing period.
• Carries a variable interest rate based on a publicly available economic index plus the lender’s margin.
• Requires monthly payments that may vary in amount, based on changes in your outstanding balance and/or the prevailing interest rate.

The best type of loan for you will depend on your individual circumstances. Generally, if you’ll need a fixed amount of money all at once for a certain purpose (e.g., remodeling the kitchen), you might want to take out a home equity loan.

MANA welcomes your comments on this article. Write to us at [email protected].