By Desmond Lin
Living with Inflation
By Desmond Lin
Inflation refers to the decrease in the purchasing power of money. In other words, when inflation is high, each dollar may allow you to buy fewer goods and services (Dayani, 2018). The amount of money in your savings account may also be worthless in terms of purchasing power. Inflation is generally measured as an annual percentage change. The most common way to measure inflation is by using the Consumer Price Index (CPI). Inflation is a huge problem for many around the world. It causes the value of your money to decrease (SingSaver, 2022), making it harder to afford the things you need.
In this article, we will discuss some ways you can tackle rising inflation and protect yourself from its effects. We will also provide tips on how to beat inflation and keep your finances healthy!
Investing in assets that maintain their value over time
One of the best ways to tackle rising inflation is to invest in assets that will maintain their value (Karen Tang, n.d.). This can include things like precious metals, real estate, or even certain stocks and bonds (SingSaver, 2022). By investing in these types of assets, you can help to protect yourself from the effects of inflation. Another great way to beat inflation is to diversify your income sources (Singapore Business Review, 2022). This means having multiple streams of income that are not all dependent on the same economic conditions. This can provide you with a buffer against inflationary pressures and help you to keep your finances healthy!
Stick to a budget and control your expenditures.
Buying on impulse and larger-ticket items above your means may lead you to spend beyond your means (Karen Tang, n.d.). It's time to examine your spending habits and lifestyle now that the holidays are behind us. For instance, instead of a branded item, you could get a no-frills one or use public transportation like the MRT.
Make an effort to save 20% or more of your salary.
If you are already in the habit of spending first and saving what's left, it's time for a change. Try to break this cycle by setting aside at least 20% of your salary for savings (Karen Tang, n.d.). As a result, you'll have surpluses to invest in longer-term investments.
Be careful not to be overly cautious.
Consider investing your money instead of putting it in fixed deposits or saving deposits (Karen Tang, n.d.). These instruments are unlikely to overcome the effects of inflation due to the lower interest rates offered. One way is to invest in funds as they can be liquid short-term investments with low sales charges and generally offer better returns than fixed deposits.
Make regular investments through an investment platform to protect your assets.
Dollar-cost averaging is a fantastic way to add to your lump-sum investment (Karen Tang, n.d.). This technique minimizes long-term risk and offers an organized approach to saving. The sooner you begin investing a set amount regularly, you will be able to take advantage of the power of compounding your returns. You can invest a fixed amount monthly with these investment tools and treat it as regular savings.
Invest for returns that will outpace inflation.
Over the long term, invest in a well-diversified portfolio of equities and bonds. A moderate-risk portfolio with 60% to 70% equities and 30% to 40% bonds might provide a good yearly return over time (Karen Tang, n.d.). Strive for a return that exceeds inflation, you may adjust these investments depending on your risk tolerance.
Recognize the compounding effect of returns on your investment.
The effects of compounding are often underestimated. Reinvesting your returns can have a significant impact on the value of your investment over time. Compounding can be a powerful tool that can help you to beat inflation and grow your wealth over time (Karen Tang, n.d.).
The Rule of 72 can be used to figure out how long it takes for your money to double if you divide 72 by the percentage return. Take 72 and divide by the yearly return, for example. After 8 years, your money will have doubled if you invest $100,000 in a portfolio that returns 9% per year.
Start early and invest regularly.
The earlier you start investing, the more time you will have to benefit from compounding returns.
Reduce your exposure to depreciating assets.
It is important to reduce your exposure to depreciating assets (Karen Tang, n.d.). These are things like cars and electronics that will usually lose value over time. Instead, focus on investing in assets that will appreciate over time. This can help you to protect your wealth from the effects of inflation.
In conclusion, there are many ways to beat inflation. By being mindful of your spending, saving regularly, and investing for the long term, you can help to protect your finances from the eroding effects of inflation. Start taking steps today to ensure that your money keeps pace with the cost of living!
Let's talk about it if you want to create a diverse portfolio of investments to safeguard your money and don't know where to begin.
By Desmond Lin
Representing Prudential Assurance Company Singapore (Pte) Ltd Reg. No. 199002477Z
Dayani, D. (2018, February 27). “9 Ways to Hedge Against Inflation with Investing” Dollars & Sense. Retrieved from https://www.singsaver.com.sg/blog/best-investments-for-inflation-to-consider
Karen Tang. (n.d.). “9 Ways To Tackle Inflation”. Retrieved from https://karentang.sg/financial-planning/9-ways-to-tackle-inflation/
Singapore Business Review. (2002, March). “What are three effective inflation hedges?” Retrieved from https://sbr.com.sg/economy/in-focus/what-are-three-effective-inflation-hedges
SingSaver. (2002, March 24). “9 Ways to Hedge Against Inflation with Investing” Retrieved from https://www.singsaver.com.sg/blog/best-investments-for-inflation-to-consider
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