A lot of us don’t realize inflation. We thought that if we have money in the bank will guarantee us safety in the long run. It may be safe for now but you are actually losing money if you park your money in the bank long term. Shockingly, bank deposits in our banking system reached Ph10.4B as of December 2016. It shows that most of the financial portfolios of the Filipinos are not well diversified. Nothing wrong putting money in the bank but you have to know your purpose why do you put all your money in the bank.
Let’s define inflation. According to Investopedia: 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. It is inevitable that you will surely lose the real value of your money if you do not invest it.
Let me illustrate:
What can you buy with Ph500 from these different years?
The illustration shows that your Ph500 in 1998 cannot buy the same value of goods as time goes by because prices will surely go up. The value of your money gets smaller long term because of inflation. Inflation Rate ranges from 1%-5% depending on the economy’s situation. Now, how you can beat inflation? You have to look for a Financial Instrument that can give you an interest rate more than the inflation rate. There are many ways how to beat inflation but for this blog post, I recommend investing in Equities or Stock Market.
Here in this illustration, if you put your Ph1,000,000 in the bank and you leave it for 20 years, this will what happen to your money.
It clearly shows that the real value of your money loses over time with an assumption of 1% interest rate per year. Inflation beats your money,the real value of your Ph1,000,000 is not the same after 20 years and even though you see that there is an increase in nominal value because it is Ph1,208, 108.95, the amount increased will not make up with the loses due to inflation. You cannot buy the same items after 20 years if your money did not beat inflation.
Now, if you put your money in an Equity Fund that can give on the average returns of 12% per year after 20 years.
In investing in Equity, the real value of your money will grow long term. You can buy more for your future financial needs because in the illustration, your money from Ph1,000,000 grows to Ph8,612,761.69.
Given these illustrations, it means that you have to look for a Financial Instrument that can beat inflation rate of 1%-5% per year. If you put your money in Equity or Stock Market, it can give you an average of 8%-12% per year. This way, you can beat inflation so that you can prepare for your future financial needs. Now, the questions is if you have a plan to achieve a financial goal for more than 10 years in the future like for your Children’s education, Retirement, Business Funds or buying your dream House? Where will you put it? You can now decide where to put it, will you just save it or invest in Stock Market?
Inflation is real, that is why while we are earning now, we need to learn how to diversify so that our money can work for us as well. You will see the benefits of investing in the future because it will give you income in the future if you cannot work anymore. Let’s beat inflation by investing our money now.