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What is inflation? and the risk of not investing


Investing is a risk, but it is even riskier not to invest. Why? Because of inflation.

Inflation is the increase in the prices of commodities thus reducing the buying power of money.  To make it simpler, the price of 1 kilo of rice 20 years ago versus its current price now is inflation.

Then why is it a risk not to invest? Here are 3 reasons why:
Inflation Rate of Philippines (Source: Trading Economics)
Inflation Rate of Philippines (Source: Trading Economics)
1. Every day we are losing money.

Gathering data from Trading Economics, a 10 year average inflation rate in the Philippines is 2 – 6% with 4% mean average.  An example would be: doing to Mcdonalds and you have 100 pesos in your wallet. You buy a value meal worth 100 and you eat happily. However, next year, the same value meal now costs 104 pesos and your 100 pesos can no longer buy it. Every day, unknowingly, we are losing the buying power of money because of inflation.

Financial Computation with tax and inflation
Financial computation with tax and inflation
2. We have negative savings. 

Most of us are saving in the banks. But have we ever asked how much is the interest rate of our savings? A lot of Filipinos don’t know. Major banks give less than 1% per year and some special accounts like SDA’s (Special Deposit Accounts) or time deposits giving 2-4% granting you have a large amount to deposit. But again, inflation is at 4%, which means you are gaining 1% in the bank but losing 4% due to inflation, doing the math: 1% growing minus 4% inflation you have a -3% value of your money. That is why, we Filipinos work so much but still feel that there is this invisible force pulling us down. That is inflation. No matter how much we save, there is little to no progress if we have a negative value of our money.

3. We have no control of inflation. 

Whether you like it or not, prices will go up. It will never go down. We need to accept it. It's like tax, we have no control of it. Worrying on things we have no control of is called stress. That’s why a lot of Filipinos are stressed out because we keep complaining on taxes and inflation. The only thing we have control of is financial education. We have to be financially educated. We need to know alternative ways of saving and thus investing is a need. We need to learn where we can invest that gives higher rates than the inflation rate.

There are financial services out there that could earn you an average of 8-12% per year beating inflation. It exists. However, Filipinos as we are, we hate the financial industry. We are fearful. We love to close down all the financial companies. But this I tell you, just like eating, investing is a need. If you go to a restaurant and you don't like the food, it does not mean you will no longer eat for the rest of your life. You go look for a better restaurant, simple. Same thing with investing, there are good financial services out there, and all we need is real financial education to know where to invest.

Investing is risky, but NOT investing is even riskier because you are sure to lose with inflation. (Content also published with few revisions from: TiyoPilo)

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