You’ve likely heard the term “inflation” everywhere – it’s one of the most integral features of an economy. All modern economies experience inflation. It is typically defined as the measure of the increase in the general price of goods over time *. In other words, inflation measures the rate of increase in price from one period of time (usually a year) to the next, and is expressed in percentages.
What is important to know about inflation is that a small level of inflation is likely a sign of a healthy economy (especially in the Singaporean context), so this increase in prices isn’t necessarily a bad thing!
Causes of Inflation
There are many various causes of inflation, but inflation generally comes from the increase in the supply of money (the amount of money in an economy) in a nation. When the money supply increases, shops can raise their prices because their customers can afford more and are buying more of their product. Either that, or shops adjust their prices according to the inflation rate that is established for that year. Increases in money supply can have many causes, both good and bad, but in Singapore, the money supply generally increases because of the revenue we make from our resources and that we earn from abroad.
The inflation rate in Singapore is 1.9%. This inflation rate is very healthy, and is a very good sign!
Implications of Inflation on Personal Finances
Here at the wealth exchange, where we want to help you maximise your personal savings and finances, the implications of inflation are supremely important to the crux of our mission.
See, if prices of goods across the country are increasing due to inflation, yet your savings rate are less than the inflation rate, this means that you are actually losing money.
Either that, or your savings rate are equal to the level of inflation, which means that you are neither earning nor losing money.
This means that the bare minimum savings rate everybody should try to aim is one that is above the inflation rate per year.
Look at it this way: Say, in 2017, you have exactly 100 in a savings account, and the annual inflation rate is 1.9%. You want to buy a laptop that costs $100 in 2017.
Initially, in 2017, you have just enough to purchase the laptop. In 2018, however, the price of the laptop and the amount you have in your savings account changes due to inflation and your interest rate respectively.
Since inflation is 1.9%, the laptop will cost $101.90 in 2018.
If your interest rate is 2.15%, you will have $102.15 in your savings account in 2018, meaning you can still buy the laptop and have a small amount left over.
If your interest rate is 1.5%, however, you will have only $101.50 in your savings account in 2018. This means that you can no longer afford to buy the laptop.
Thus, it is optimal to have a form of personal finances account with an interest rate that is as high as possible above the inflation rate to make sure that you are not losing money over the long term. This is best achieved through investing, and not saving, which is explained in the following section.
Saving VS Investing
The issue about savings accounts is that they are not enough to counter the rising inflation rate; many savings accounts do not have a high enough interest rate to do so, nor do they operate in a way that ensures that you are making as much money as possible from your finances. Thus, it is best to invest, not merely save, in order to maximise one’s personal finances.
While saving merely means accumulating cash over time (usually in the form of savings accounts and most fixed deposits), investing is targeted towards growing this accumulated cash. Personal finances should not only be about having ensuring that one’s savings are above the inflation rate – which is only the bare minimum. It should be about maximising one’s personal savings so that you are able to grow your savings as much as possible, which is best achieved through investment via various means such as REITS, mutual funds, bonds, and so on. We have elaborated more on this in our post Savings?! What Savings?, so do make sure you check it out!
Though investment may seem like a daunting task at first glance, it can become more and more manageable once you put yourself up to the task of learning and understanding how to invest. Investing is becoming more and more necessary in Singapore, where finances can be tight. The good thing is, opportunities to invest in Singapore are plentiful, and you can definitely find a suitable means of investment once you know how to seek it. So be sure to stay updated with Wealth Exchange for more easily understood content on how to maximise your finances!
* there are many ways to define inflation, and many economists still debate about the proper way to define inflation, so let’s just try to understand it in a simple way: it is the rate of change of the price of goods (or, if you want to use the proper term, the general price level) over time. Some measure inflation according to the worth of the dollar from one year to the next, but the math in this case would generate a similar result as the one we described previously.
Stay tuned ! Till next time …
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