One of the factors that can eat in significantly to the returns on your investment is inflation.
So what is inflation and how does it affect your investments?
Inflation is generally defined as a persistent increase in the prices of goods and services which over time leads to a decrease in the purchasing power of money. It usually happens when there is more money in the economy relative to the supply of goods and services.
With the increase in oil prices, that lead to increase in costs of transporting goods among other things, and the current global food crisis, many Asian countries, including the Philippines are now facing the issue of inflation.
As of May 2008, the Philippines inflation rate as reported by the NSO is 9.6% – a significant increase from last year’s 2.8% average and is at its highest since 1999.
At the current rate (9.6%) and using the Rule of 72, you’ll know that it will take (72 divided by 9.6)
only 7.5 years before your money’s buying power is cut in half. So if for example, you have a monthly salary of P25000.00, then in 7.5 years it would be equivalent to like having a P12500.00 salary, if the current inflation rate persists.
What does it mean for your investments then? Ideally, your investments should outgrow the rate of inflation (and taxes). To get an after inflation return, simply subtract the average inflation rate from the rate of return of your investment.
Your regular savings account at a bank earns only about 0.75% per annum. If you subtract the inflation rate, you get a negative interest rate. Imagine how much purchasing power your savings will actually have years from now when you need it!
It’s advisable to keep only your spending money in your savings account. Your savings for the future is better off with other investment instruments earning higher returns. Which instruments are best? It depends on each individual and it’s best to consult a certified Financial Planner.
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