Are you aware that you’re losing money to an unseen force – Inflation? You may not see it, but you definitely can feel it. It’s happening all around us, everyday, and even right now as we speak. Although we cannot see this force (just like gravity), we can understand it and learn how to overcome it! So let’s get started!
What Is Inflation?
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. We all can feel the impact of inflation in our everyday lives but why don’t we ask ourselves how can we reverse the effects or keep pace with the rise in inflation? The most basic example I can think of is food. We all have encountered times when our favourite food stall increased their prices, but we still buy from them and grumble about the price increase until we eventually get used to it. But getting used to it doesn’t remove the issue at hand – The risen price. We gradually accept that the new price is the norm and forget about how much it was in the past and over time, we pay more and more without questioning what is this power behind at work – Inflation.
Above is the inflation rate of Singapore over the past 5 years and evidently, we see the mean inflation rate to be around 1.6%. This means that every year, prices are increasing at a rate of 1.6%. Translated into dollars and cents, something that costs $1000 today will cost you $1016 next year. How about a more painful example? Your $1000 will be worth only $984.25 next year. Now, how do you like losing money for not doing anything? Inaction costs you money. Doesn’t seem so much, but with all things related to compounding action, it slowly builds up. Let’s be real here, your salary doesn’t keep up with inflation. So what can you do?
As always, you have options. Which are you choosing?
- Do nothing (Allow your savings to be eroded)
- Put it in the bank (Current interest rates at 0.05% p.a)
- Fixed Deposits (For those who simply want to keep up with inflation)
- Investment (Your best bet to beat inflation. Sounds like it requires extreme financial knowledge, but it’s not true.)
For those of you who chose to do nothing, there’s no need to feel ashamed for not taking action, if you don’t know how. But we encourage you to take active interest in your OWN money. Remember, you lose $16 per $1000 every year doing nothing. There’s a price to pay even if you do nothing.
Put it in the bank
Yes, the bank gives you interest for parking your money with them. How does $0.50 per year sound to you? You’re still losing $15.50. It’s definitely not the right way if you don’t want to lose money not doing anything.
You probably know a couple of people who are doing fixed deposits and it’s safe. Or is the safeness perceived? A couple of months ago, when fixed deposits were offering 1.5% interest for a couple of years, should you have locked yourself in at that rate, you’ll be losing to inflation if inflation rises above 1.5%, which isn’t shocking. Now that fixed deposit interest rates are generally being offered at 2%, who’s to say the inflation won’t rise to above 2%, and you end up losing as well? But of course, it’s more than likely you’ll keep somewhat in pace with inflation.
The word ‘Investment’ immediately strikes fear to some. It’s some mystifying creature not to come near. Many stories were heard about how people have gotten their fingers burnt in the market, etc. In all fairness, hear me out. There is a difference between ‘Investment’ and ‘Speculation’. If you’ve heard of people going bankrupt or having to sell their house, etc., they are probably speculators who have no idea what they bought. If something is rising, they buy.
Give me a chance to show you what ‘Investment’ is. For most people who aren’t financially savvy but yet know the importance of investing to beat inflation, and not just to keep up with inflation, here is your best chance. There are many different types of stocks in the market, for people with all sorts of risk appetite. I want to introduce to you the ‘safest’ of them all. Touted the safest because it’s a composition of the 30 biggest and most stable companies (Keppel, Singtel, DBS, OCBC, UOB, etc. you get the drift) listed in Singapore Exchange, all compiled into one product – STI ETF.
STI ETF has produced an average return of 6-7% in the past 10 years, which is more than enough to beat inflation of 1.6%! Now, isn’t that interesting? This is also one of the very few avenue available to retail investors like me and you to properly beat inflation consistently and in the long run. But we will leave that for another post, so stay tuned to our blog posts and subscribe!
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