How to Calm Financial Panic During Inflation Surges The Head of Personal Financial Management at Goldman Sachs says entrepreneurs can take practical steps to manage rising inflation.

Four decades after the last big spike, people are not just thinking about inflation; they are naturally concerned about what the impact is on their overall financial situation. We are spending a lot of time speaking with clients – especially entrepreneurs – about practical steps they can take to manage rising inflation, one of the largest financial stressors over the long term.

To alleviate financial anxiety, we are helping clients adjust their plans and occasionally modify spending habits. These are muscles some have not used for a while which makes it harder, but everyone's life plans can be affected by inflation. Since many entrepreneurs have so much of their wealth tied up in their businesses, comprehensive planning can help maximize the return on their entire financial lives, now and in the future. So, let's discuss tips for minimizing financial stress in a time of inflation.

First: Do not panic.

Not all investments are negatively impacted by inflation. It's important you have plans in place to mitigate the effects of inflation. Reassessment and adjustment may be needed along the way. To avoid catastrophic choices, try to be unemotional when making any shifts since emotions can be very destructive when making financial decisions. Unforeseen events can and do happen, so stay diversified, but most importantly find a way to make decisions with a calm and objective long-term perspective.

Related: Inflation Is a Risk for Your Business, But Doesn't Have to Spell Doom

How inflation impacts short-and long-term financial planning depends on three questions: is the inflation transitory, or more persistent; how much of your net worth is liquid rather than future earnings potential; and how much longer do you expect to run your business, then exit or retire?

Inflation that spikes for a couple of years rather than decades is more manageable since it is temporary. Our research indicates the surge in goods prices will likely moderate, but higher shelter inflation and rising wages caused by a tight labor market could prove to be more persistent. This suggests investors should not be overly reactive but have plans that are adaptable to changing circumstances.

Second: Focus on what you can control.

You can't control inflation or its impact on your investments. Market action always has an effect on portfolios, but personal habits are also important. Managing spending is a powerful lever that you have complete control over. When everything costs more, individuals often have less latitude. Make choices that help you to withstand inflation.

Think of yourself as a business: spend less, be balanced, conserve capital.

Unfortunately, some people will spend more today because they think their money will be worth less next year, but that just reduces their capital and unwittingly increases their long-term risk. It is important to have an objective review of spending priorities, and a trusted advisor can help.

Third: Be willing to compromise.

Whether you work with an advisor or not, it's important to understand not just your finances but what shapes your views on money, and how your life and money connect. There are likely going to be tradeoffs; inflation has a way of making those choices starker. A good financial strategy takes into consideration your values and priorities. Amid inflation surges, asking what tradeoffs you are willing to make in an objective way can help reduce emotions and lead to better outcomes. That's true about your investment portfolio too. Knowing what you are willing to live with (and without) over the long term leads to prudent portfolio rebalancing and retirement planning changes in the short term.

An entrepreneur's perspective: Equity Over Debt

As a fellow entrepreneur who founded and sold two companies to Dow 30 firms over a couple of decades, I learned some valuable lessons. In inflationary times, it becomes an economic imperative to focus on costs. Finding ways to manage margins becomes difficult when customers are resistant to price increases and you have to ride out higher input and interest rate costs. If rates keep going up, there's a time when it could be prudent to raise equity capital rather than debt capital. For the last decade, the opposite has been true.

Balance sheet debt could become unmanageably expensive if inflation proves to be persistent. Consider recapitalizing and restructuring well ahead of potential capital calls. Be on top of it.

An investors' perspective: Maintain a Well-Diversified Portfolio

In uncertain times where market volatility can be unnerving, it is important for investors to maintain a well-diversified portfolio with exposure to different asset classes, consistent with their risk profile. If our base-case of continuing U.S. economic growth and moderating but still elevated inflation is correct, investors should consider maintaining appropriate exposure to stocks in their portfolio, as stocks have historically been the most consistent asset class in outperforming inflation over longer time horizons. Though stocks can and will experience volatility, over time they play an important role in achieving long-term growth in a diversified portfolio. Having a long-term view and staying invested in equities, especially during times of economic expansion, has historically rewarded investors with positive returns.

Related: Maybe We Should Embrace Inflation

When it comes to bonds, it is important for investors to own high-quality bonds in their portfolio in order to provide diversification as well as a hedge against deflation.

As for options like gold, other commodities and cryptocurrency, there is little evidence to suggest that these assets protect investors during times of market volatility, and over longer time horizons, have not consistently outperformed inflation.

Inflation can be a major source of financial anxiety because we do not know how bad it will get or when it will end. This is not a time to spend beyond your means or take on major debt. And if you aren't sure about which investment decisions to make, consider collaborating with someone objective who's paid to be on your side, to help you navigate the tough decisions. A good financial advisor should help to minimize stress and maximize your return on life – today and tomorrow.