Don't ghost your insurance agent friend when he talks about inflation, they might just provide one of the most relatable and practical examples of how macroeconomic data hits your wallet.
Yes, inflation does diminish the value of your money over time, assuming the only way your money grows is through interest on a regular savings account.
Let's take out the financial jargon to illustrate it better. When I was in elementary in the late 1980s, a bottle of Coke cost P3.50 in our Catholic school. By the time I was Grade 6, it was around P5. During freshman year in UP during the late 1990s, a UP IKOT ride cost P1.75, Now, the base fare for jeeps is roughly quadruple that amount.
Prices of goods have no general direction to go but up. Inflation measures the amount of increase in consumer prices during a given period. In the Philippines, it is measured monthly. In February 2021 for example, inflation accelerated to 4.7%, the highest in two years, brought about by a shortage in pork.
Consider your monthly budget. During a high inflation month, the money you set aside last month may not be enough to buy the same quantity of goods this month.
Now, consider the money that is sitting in your savings account. Let's say you have P100,000 and inflation is at 4.7%, your money is in reality worth P95,300. This factors in in the decrease in value of P4,700 due to the 4.7% inflation.
Let's say that savings account earns 0.10% annually, that's P1,000. If the value of your money kept in savings is diminished by P4,700 due to inflation, the P1,000 interest earnings is not enough.
If not savings, where should you put your money if not in a savings account? Financial planner and financial literacy champion Salve Duplito suggests investing in higher-yield instruments such as stocks and bonds.
For as long as inflation is higher than the interest rate on a savings account, your money will not be as safe as you thin. Duplito calls inflation a "silent killer."
Keep in mind that an investment can go either way, you could earn or lose money. There's no such thing as a sure thing. Duplito was a business reporter and my former editor at INQ7.net. At that time in the early 2000s, there was no social media but there was no scarcity of get-rich quick scams.
The general rule in investing is the higher the risk, the higher the potential yield. This is true for the stock market with its wild swings. More conservative investors are better off with government securities, an IOU from the government.
Check out Bonds.ph for app-based options. It's powered by Unionbank, one of the first local lenders to make digital work for their clients. If you're a regular user of the Unionbank app, the Bonds.ph app will feel familiar.
Since we are in a pandemic, financial advisers recommend ensuring that you have an emergency fund before you consider investing.