Inflation is the general increase in the price level of goods and services in an economy, where a unit of currency effectively buys less than it did in the past years. It is often expressed as a percentage, hence indicates a decrease in the purchasing power of a nation’s currency. Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.
Margaret Thatcher defined inflation as “the unseen robber” which devalues our savings and our lives. It may sound far-fetched especially to people who prefer to keep their money in a savings account where they can see it, but experts identify inflation to be the worst enemy to this class of earners. To better understand this, Financial expert, Damilola Alonge explains:
If you had N1 million in 2008 and it wasn’t invested, and the average inflation rate was 12% over the ten year period, your N1 million has now become N321, 973.24 in value. Meaning, your N1 million is now worth about N321k today (in 2019).
Furthermore, a 35 cl bottle of coca-cola was sold for 15 Naira in 2001, now in 2020 same bottle of coca-cola costs not less than 100 Naira. Over this 19-year period, 15 Naira in itself did not lose any value in terms of its number but when expressed as a currency, its purchasing power has greatly reduced,
thanks, no thanks to inflation.
Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change. While inflation might be favorable to those with tangible assets, like property or stocked commodities, because it raises the value of their assets. People holding cash may not like inflation, as it eats away at the value of their cash holdings. Ideally, a certain level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth. But regrettably, In Nigeria where the inflation rate as described by experts is “stubbornly high” (as high as 13.5% in 2020), it becomes especially difficult to make any meaningful financial planning that is entirely dependent on savings alone. Nothing else could ever be more frustrating, especially for savers who merely stash money somewhere in a savings account.
Having understood the relationship between Inflation, purchasing power and its effect on the value of a currency, we can now see the need to protect our hard-earned savings from the gruesomeness of inflation.
YOU MIGHT LIKE: HOW TO START INVESTING; A GUIDE FOR BEGINNERS
Experts recommend these 5 classic advice on how to protect yourself and your treasured savings from inflation.
INVEST IN YOURSELF
Investing in yourself begins with quality education and continues with keeping your skills up-to-date and learning new ones that will match those most needed in the nearest future. Being competent in a valuable skill such as a high-demand digital skill for example, would ensure a continual in-flow of income and can translate into a side gig, granting you access to an additional stream of income. This can help cushion the effects of inflation on your fixed monthly salary.
On the other hand, innovating to stay relevant in your industry will not only help to make your earnings inflation-proof, but also recession-proof your career. This is the first, and in my opinion, the most important step for young people in protecting themselves from inflation.
INVEST IN THE STOCK MARKET
For newbie investors this might be a great deal testy, but reports have shown that a good way to fight inflation is by buying stocks of companies who can naturally increase the price of their goods during periods of inflation. This will lead to a growth in the company’s revenues, its earnings, and climaxing in an upward movement of its stock prices. These companies will generally fall under the category that trades specifically in grains, oil, and metals. It is noteworthy that electronic goods such as computers are subject to manufacturer and distributor price adjustments only and might not necessarily experience an increase in price during inflation.
BUY INTO REAL ESTATE
Real estate has proven over time to be a good investment decision when it comes to preserving the value of your money over a long period. When done for the right reasons, real estate promises huge returns on investment. However, problems occur when a buyer’s goal is to toss the property they just bought at a profit. unless you are an experienced real estate investor, the average person should focus on purchasing a home or an empty land with the intent of holding on to it, for a few years at least. Real estate investments do not typically generate a return within several months or weeks; they require a long waiting period in order for values to increase.
Building a home can help protect you from increase in the price of rents when the inflation rate goes higher. Similarly, tenants can pay rent to live on your property thus generating passive income for you.
CHOOSE HIGH-INTEREST MUTUAL FUNDS
Investment experts always advise that mutual funds make for a good investment plan and can withstand inflation. The reason is that they are diversified in nature, you get a combination of stocks, bonds, Exchange – traded Funds (ETFs), real estates, precious metals, etc in one investment. With this, the risk is spread out across a wide portfolio. Another advantage is professional management which does not cost you more, thus you can invest your money with confidence that your investment is being managed by experts.
CONTROL YOUR PERSONAL INFLATION
You need to cut down on unnecessary expenses and acquisitions that indirectly make your income into a debt-servicing tool. Acquisitions such as a car for example, when you have only one stream of income perhaps, a monthly salary is a bad idea. Inflation only hits you more when you spend, thus it is important to relent on your spending habits as a way of lowering your exposure to inflation. So, if you have a habit of overindulging in shopping and buying things impulsively, you should commit to not buying until your income surpasses your cost of living.