The silent savings killer

The silent savings killer

from pinoysmartsavers.com

The smart Pinoy saver should be aware that there is something out there that's slowly but constantly eating up the value of their savings. This silent savings killer is inflation. You could be the best "saver" in the planet but if you do not counteract the effects of inflation on your savings you will be frustrated to find out that you haven't saved enough.

The cost of 1 kilo of rice or chicken does not remain steady. It's always changing. It can go up or it can down although that hardly ever happens. Inflation measures how much prices of goods & services have increased in a year and is expressed as a percentage. The bigger the percentage, the higher the increase in prices. Deflation, which reflects a decrease in prices, is also possible but rare.

An annual inflation of 5% means that a sack of rice which cost P1,000 last year is now worth P1,050. If this inflation rate continues, the same sack of rice will cost P1,710 ten years later and your P1,000 can only manage to buy about 29 kilos of rice instead of one sack. The net effect of inflation is that the same amount of money will buy you less amount of goods and services in the future.

When you build funds for your future needs you have to take into consideration the effects of inflation on the value or purchasing power of your money. If today you are spending P10,000 for your monthly expenses, you will need much more than that 30 or 40 years from now to buy the same amount of stuff you are presently buying. The table below shows the equivalent of P10,000 at various times in the future if the average annual inflation rate is 5%.

Thirty years from now you will need more than P43,000 to cover your monthly expenses and a great deal more in forty years. You might think that a million pesos in retirement funds is already something. But at the given inflation rate above, P1 million forty years from now is actually only worth P142,000 in today's money. So think again. If you were to retire today how long will P142,000 sustain you?

Inflation also plays a key role in selecting the right savings or investment products. You should only put your hard-earned money in savings & investments with interest rates higher than the average inflation rate. If you put it in something that earns at lower rate, your money may be growing but it will actually be losing value & purchasing power.

A regular savings account in a commercial bank typically pays 1% interest per year. If you have a P1,000 deposit in the bank it will only earn P10 in interest (forget the withholding tax for now so you won't get so depressed about regular savings account). After a year, your money has grown to an "amazing" P1,010. But wait, the cost of one sack of rice has increased from P1,000 to P1,050. A year ago, you could buy a sack of rice with P1,000 but now the money you deposited which has grown to P1,010 can't pay for the whole thing; you're short by P40. Yes, your money may have increased a bit but it can buy less.

So make sure that you put your money in an account whose interest rate outpaces inflation like long-term time deposit accounts or an investment vehicle with a great potential to grow more than the inflation rate like mutual funds and stocks. Use low-interest regular savings account only for money you use for recurring monthly expenses and your emergency fund