How You Can Beat Inflation

Most Filipinos are familiar with inflation. It is the continuous rise of prices in the market. According to investopedia, inflation is “the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.”

inflation is real

Ten years ago, when I was still a student in UP, my tuition fee every semester ranged from Php 5,000-6,000. UP tuition fees now range from about Php 25,000-35,000 per semester. This is 5 times more than it was 10 years ago. This shows that as time passes by the prices of necessities like tuition fees and education rise and the purchasing power of our money gets smaller and smaller.

computation of tuition fees up diliman

On average, inflation rate in the Philippines every year is about 5-6%. This is one of the reasons why the prices of commodities go up.

Filipinos often put their money in a savings account or a time deposit. A savings account returns about 0.85% annually. If our inflation rate is 5% on average, merely putting money in a savings account is not enough to beat inflation. We have to put our money in other financial instruments that give us more returns; otherwise, achieving our financial goals will not be possible.

Let’s look at the comparative analysis below. A man sets aside Php300,000 for his retirement. He places this money (Php100,000 each) in 3 different financial instruments – a savings account, long term bonds and  equities – and leaves his money for 20 years.

issues to consider

In a savings account, the man’s money does not grow. The 1.00% annual interest only results in Php123,239 after 20 years. Some may say that    Php123,239 isn’t bad, considering that it’s more than it used to be. But, this amount is very low compared to what other financial instruments can give and your money did not earn.

With long term bonds, the man’s money grows with a variance of 176% and he gets Php278,596 after 20 years. This is more than what a savings account can give. Great, right? But, he gets even more with equities! After 20 years, his Php100,000 becomes Php 1,080,385 – all this money without even working or lifting a finger!

In spite of being aware or taught to invest our money in bonds or equities, most of us still choose to put our money in savings accounts because we believe that these are safe. Yes, savings accounts are safe – no risk touches our money – but our money eventually loses its value because of inflation. Now, this is not to say that savings accounts are bad. Financial instruments like these and time deposits are actually very useful and are great for short term financial goals. For long term goals, however, maybe it’s time that we consider other instruments that give high returns like equities and bonds. As we have seen above, these instruments help us beat inflation and give us more money to enjoy.

Some people refuse to invest in equities and stocks because these are too risky. It’s true. Investing in equities and stocks is risky if it is done without the proper guidance and knowledge. That is why a lot of financial institutions offer mutual funds, UITFs and Variable Unit Linked, so that fund managers can grow and manage our money properly. For those who would like to invest in the stock market on their own, they can learn through experts, attend seminars, and read books on investing and trading and even seek an advice from a Financial Planner.

Inflation is real and inevitable, and the only way for us to beat it is to choose financial instruments that give returns higher than the average inflation of 5-6% every year.

To read more on inflation, visit: http://www.investopedia.com/terms/i/inflation.asp#ixzz3ixuObDpN

To learn more about Financial Planning.

You may reach me.

Archie M. Yuki

Financial Advisor

The Insular Life Assurance Ltd., Co.


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