One thing that a lot of people do not consider when saving or investing is inflation. I was one of them. But inflation has a big effect on your savings and investment returns. Especially if they are for the long term.
What Is Inflation
Inflation is a measure of how fast the prices of goods and services rise in a country. As it rises, so does the prices of goods and services. This in turn reduces the value of your money and buying power.
Let’s use an example to illustrate this. If the price of bread today is KSh 50 and the current inflation rate is 5%; the price of bread could go up by KSh 2.5. This is assuming the government or market forces don’t intervene to keep the price the same.
If you are old enough, you probably remember a time when bread was KSh 5. As the years went by, the prices increased to the current price of KSh 50. This price change is caused by inflation.
How Inflation Impacts your Savings and Investments
Over time, inflation can reduce the value of your savings, because prices will go up in the future. This is most noticeable with cash.
If you keep KSh 100,000 under your mattress, that money will not be able to buy as much 20 years from now. While the money remains the same, the prices would have gone up considerably. This means that you would have to spend more to buy the same items as you would today.
So in essence, your money will be worth much less 20 years in the future.
The same applies to investments. If you place your money on investments that are lower than the inflation rate, then they will be losing money over a period of time.
Kenya’s inflation rate over the past few months has been between 5-6%. If you invest in a product that returns 4%, then your return on investment would be between minus 1% and 2%. This means you lost money even though it looks like you have made money (4% return).
What to do now
If you do plan to save your money in the bank, pick a savings account that offers a higher interest rate than inflation. Alternatively, you can place your money in moderate-growth low-risk investments like the money market fund.
For investments, place your money on things like the stock market which can have higher returns over a long period of time. Also, buy assets like land and real estate as they tend to outgrow the inflation rate every year
Final note
Inflation is part of the economy and cannot be avoided. But by placing your money in the right investments, you can help minimise its effects on your money.
Disclaimer: This article provides information and education for investors. Please do your research and consult your financial advisor before making any decisions.
This is really good content! It’s very eye opening, there’s a lot about how inflation works that i didn’t know. I wish more young people could read this, especially with how the current economy is
such a good piece of information