Have you heard the saying “Going Broke Slowly?”
If you are ONLY saving in the bank and have no investments, you are going broke slowly.
Why? It is because of INFLATION.
What is Inflation?
Investopedia defines inflation as:
“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.”
Basically, it is the increase of the cost of goods and services.
To make it simpler, here is an illustration:
Before you can buy P50 BURGER, now your P50 can only buy a small burger.
Relating it to your money, your P100, if placed in a piggy bank, will be half its value after 23 years at annual inflation of 3%.
How much interest does your bank gives you?
Below is a sample of savings account and time deposit interest rate in the Philippines:
Bank deposit rates will always be lower than the inflation rate.
Bank deposit is there for liquidity and should be used for short-term needs and for Emergency Fund.
Going Broke SLOWLY!
If your savings account gives an return of 1% and inflation is 3%.
Your real return is -2%:
1% Savings Rate – 3% Inflation Rate = -2% Real Return.
Given this return, your money will be 40% its current value after 45 years. Hence, if you started working at 20y.o. and placed P100,000 that year in your bank account, it will just be P40,000 when you retire at 65y.o.
That is why you are Going Broke Slowly if you just place it in the bank.
The Solution is to Invest!
Make your money grow more than inflation.
Take note that headline inflation (the one released in the news) is different from personal inflation.
Personal Inflation is more or less higher than headline inflation because headline inflation measures basic goods and services.
Personal inflation is higher because the increase in price of specialty coffees, movie tickets, restaurants, gadgets, travels, etc. are not included in headline inflation. To measure your personal inflation, you need to track your expenses for 2 years and compute how much it in increased.
Always keep in mind that knowledge is power. The more you know about financial system, the more you it work harder for you.
To end, below is a great infograph of PruLife UK about inflation:
Your Millennial Wealth Planner,
Harold Q. Gardon, CWP, CEPP
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