Chasing The Purchasing Power Pace
Did you know that the value of
your money will be worth half its value in approximately 11 years’ time? And
the unfortunate thing is that you cannot do anything about it thanks to the
silent “killer” causing havoc in our economies called inflation.
Inflation is a general increase
in prices and fall in the purchasing value of money. Every central bank’s main
purpose is to control price stability, therefore a Monetary Policy Committee is
appointed, mainly consisting of six people, to decide on the repo rate using
all the information available. Inflation is targeted between 3-6% in South
Africa and it is been left unchanged at 6.5% for several quarters.
The formula is:
Years =72 /
inflation rate.
Since South Africa’s inflation
rate is currently 6.5%, it will take 11 years for your money’s purchasing power
to halve.
The “Rule of 72” is also used for
various situations that have a growth rate. For instance, if the fixed deposit
“investment” from your bank offers you 6% on your investment then it will take
12 years for your “investment” to double your money. Therefore, knowing that
due to inflation the value of your money would half in 11 years’ time, would
you still consider the 6% rate on the fixed deposit as a good form of
investment? I don’t think so!
The Rule of 72 assists us in making
financial estimates by asking ourselves important questions in terms of hedging
inflation by looking for investments that outpace it.
We all want to be smart with our
money by making it work for us, but what type of savings and investments would be
ideal in times like these?
Personally, I’m risk loving and
always seek ways of getting better returns, so I’m probably not the most qualified person to give advice (lol). However we live
in fun times where cryptocurrencies and foreign exchange markets are a thing,
so there is nothing stopping us millennials from learning how it works and
taking advantage. Investing in stocks, bonds, property and sustainable
businesses has been proven for years as being the best form of investments.
Therefore next time you are
offered a fixed income policy, fixed annuities, education plan for your 5 months
old child, or any form of fixed “investment”, please consider the Rule of 72 to
guide your decision.
References
Bresiger.G. (2018).Combating
Retirement's Silent Killer: Inflation. Investopedia
Hange.L. (2017). Hawks and Doves of
Inflation. Awaited Opinion.
(2018).The buying power of money:
Why 72 is an important number in business. Way to Wealth.
(2018). How does inflation affect
fixed-income investments? Investopedia.
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