Understanding the Impact of Stagflation on Personal Finances 

Do one thing: Remember that economic downturns (and upswings) are all part of the ebb and flow of the economy. Try to spend less than you make consistently and then save the remainder every month in a separate account for emergencies.   

Are You Ready for Stagflation?

While stagnation hasn’t officially gripped the United States since the 1970s, there are rumblings that the issue that combines rising inflation with low economic growth and high unemployment could potentially rear its ugly head in the not-so-distant future.  

States at Risk for Stagflation

In fact, a report released in August from National Business Capital names the U.S. states most at risk of stagflation in 2025. The review of regional and state data found that California is at the top of the list and shows the most signs of stagflation, with its skyrocketing housing costs and high underemployment. Rounding out the top three states on the list are Connecticut and Kentucky.

While it’s unclear whether any part of the U.S. (or all of it) will fall into the murky pit of stagflation, it’s always wise to get your financial house in order, just in case things take a turn. Here are some strategies to prepare financially for stagflation and the unique challenges it presents.

Potential Impacts of Stagflation 

Certified Financial Planner Matthew Hofacre, who is the founder and senior financial planner at Pay It Forward Financial Planning, helps guide clients through challenging financial situations. “The problem with stagflation,” he says, “is that the Fed cannot simply raise or cut rates and fix both rising inflation and slower economic growth.”

So, how could stagflation potentially impact you?

• Shaky Job Market: Because stagflation is marked by high unemployment, you should be prepared to potentially lose your job. “If companies are not producing at full capacity, then their revenues are down,” Hofacre notes. “When revenues are down, companies cut costs to ensure a profit is made.” 
• Decline in Savings and Investments: Historically, stocks perform well during times of economic growth, but not during times of economic slowdowns. “Also, bond prices have an inverse relationship to the movement of interest rates,” says Hofacre. “As interest rates rise, bond prices drop. If you purchased a 4% bond last year, but now you can purchase a 6%, then you will have to drop the price of the 4% bond to make it attractive to sell to another investor.” In other words, stagflation creates an environment that’s not conducive to good returns for stock funds or fixed-interest paying bonds.
• Shrinking Dollar: The dead presidents on the paper money in your wallet won’t be worth as much. While inflation is great when we negotiate raises, he explains, it’s not great for the money in your checking account. “Inflation erodes the purchasing power of your money,” says Hofacre. “Simply put, your dollar does not purchase the same basket of goods today as it did five years ago. Stagflation does not help your purchasing power; it erodes it.”

How to Prepare for Stagflation (and limit its impact on your finances)

Here are a few ways that you can prepare for stagflation and any potential effects it may have on your personal financial situation.

Eliminate High-Interest Debt

If you are not paying off your credit card balances in full each month, it’s time to start chipping away at the high-interest debt as quickly as possible.

Here’s one way to eliminate debt:

• Start with the card that charges the highest interest rate and throw as much as you can at that balance while still making at least the minimum payment on all of your other cards.
• Once you pay off the first card, congratulate yourself and move on.
• Rinse and repeat with the next highest-interest rate account.

Build or Boost an Emergency Fund

There is a peace of mind that comes with knowing you have money set aside in case something happens. For those not yet retired, Hofacre suggests his clients have a minimum of six months of living expenses stashed in a high-yield FDIC-insured bank account. Emergency funds can provide a safety net if you find yourself without a full-time job.

How Much Do You Need in an Emergency Fund?

Exactly how much you need to have saved depends on several factors, including:

• The number of people who live in your household.
• The number of people in your household who are employed.
• You may need to save a little less if more than one person contributes to the household bills.
• If you are the sole breadwinner for a family of four, you should try to save at least a few months’ worth of living expenses. 

Diversify Your Investments 

Ideally, having a diversified portfolio for retirement planning is best. Why is that? Diversification helps ensure you don’t put all of your eggs in one basket – or your risk in one place. Having a healthy mix of investments, including:

• Hedge funds
• Stocks (mutual funds, ETFs, index funds)
• Bonds or Bond Funds (short and long term)
• Real Estate and REITs
• Annuities

This may help to reduce risk and prove to be a solid strategy over time.

Stay the Course and Pivot When Needed

If it were to happen, stagflation would cause some short-term bumps in your financial plan and investment accounts, says Hofacre. However, a good financial plan is meant to provide a guide for where you want to go. “All plans are meant to be altered as new data comes in,” he says, “but you shouldn’t make huge changes because the economy finds itself in a suboptimal environment.”

With reporting by Casandra Andrews