An individual can invest for a variety of reasons. These can range from growing your money to saving for retirement, or reaching another financial goal. There are a multitude of other reasons too. However, at the crux of the matter, we all invest for one key reason – to beat inflation.
Inflation erodes savings
Inflation in economics refers to the general increase in prices and fall in purchasing value of money over time.
What this means is that over the years the purchasing power of money will decrease. Let’s look at a quick example from a calculator I found on the Monetary Authority of Singapore (MAS) website that illustrates this.
Source: MAS website, Inputs by Author
If we look at the information keyed into the inflation calculator, we get a glance of how prices have increased over the past 10 years from 2008 to 2018. A similar basket of goods in 2008 would have cost an individual only S$8,498 in today’s dollars but fast forward to 2018 and that same basket costs S$10,000.
This is a 15% reduction in the value of money over the past 10 years and on an annualised basis it is a 1.61% reduction every year.
Looking at the data in another way, this also means that money which was left in the bank to earn only 0.05% (current bank account interest rate) would have lost 1.56% in value each year over the past decade…not a great return.
From the calculator above, it becomes clear that some form of investing is necessary for all of us if we want to protect the value of our money over the long term. Stay tuned as in my next few articles I will discuss some viable options to protect against this erosion of wealth.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.