Ladies and gentlemen, meet Inflation.
What is inflation? According to InvestorWords.com, Inflation is a general upward price movement of goods and services. Over time, as the cost of goods and services increase, the value of a peso is going to fall because a person won’t be able to purchase as much with that dollar as he previously could.
Simply put: If you can buy a chicken meal for Php 100 today, chances are, the same meal would cost much more than that in 2020. Here are some more tidbits about a silent-peso killer a.k.a. inflation:
1. Prices of goods increase over time. Like our case above, there’s no way but up. This is with price trend, that is. You can validate this information here. . Ask the elderly about the prices of fruits, toothpaste, tuition fees, just about anything and you’ll get a much lower price compared to our commodity rates today.
2. Inflation is inevitable. While inflation naturally fluctuates, its movement do not stop. This means that your money has to ride the wave of inflation, or outperform it.
3. Interest income from savings account is way less than inflation. Suppose you have saved Php 120,000 this year. To fight inflation, you have decided to put your money in a bank’s savings account. Now, let’s do the math:
What does this mean?
- Good News: If you’ve saved your Php 120,000 in 2013 and never withdrew any amount ever, your money will be Php 123,033.98 at the end of 10 years.
- Not-So-Good News: Your Php 120,000 has a new purchasing power after 10 years. How much? It can only purchase Php 86,683.18 worth of goods and services.
- Have you surpassed inflation? No. When Year 2022 comes, your money has lost its purchasing power Php 26,742.85 due to inflation.
4. You can do something to beat inflation. While it’s a sad reality that our savings interest income won’t stand a chance against inflation, there are quite a lot of investment instruments we can put our money into. Again, suppose that you have saved Php 120,000 this year. However, this time, you have decided to open a mutual fund account.
What does this mean?
- Good News: If you’ve saved your Php 120,000 in 2013 and never withdrew any amount ever, your money has now grown to Php 335,850.82 at the end of 10 years.
- Yet another good news: While your original Php 120,000 still has a purchasing power of Php 86,683.18 by year 2022, you’ll still be Php 173,366.00 richer since your income from mutual fund investment is much greater than the effect of inflation.
- Have you surpassed inflation? Way beyond! Php 202,842 is your gain while Php 29,476.82 is your loss due to inflation.
You know what they say? “There are risks that we take but we don’t see.”
Let’s do something today and head on towards a brighter future.
Kristine Licuanan is a consultant and a certified public accountant. She believes that learning about money matters can be fun and easy. Aside from personal finance, you’ll find her writing about coffee, books and fashion. Feel free to visit her blog (CallMeKristine) or follow her on Twitter (@callmekristine).
Image credit: Geronimo Balloons
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