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INFLATION is a silent thief – you will not necessarily notice how much it erodes your savings over time, because their physical ‘value’ does not change, but what you can buy with those savings is being cut, unless you do something about it.
The rate of inflation is detailed by countries based most often on a basket of goods that you would buy, such as the staples of bread, milk and eggs. It is the changes in consumer prices that make the biggest difference to your spending power, and the inflation measure is a means of identifying nationally what is happening with regard to these prices.
The rates across Asia are currently very varied. For example, the inflation rate in Thailand stood at 3.4% in January. In December, the latest available figure, China’s inflation was at 4.1%.
Cambodia is faring slightly worse according to the latest available figures, and was at 5.7% (November 2011) – although this is far less than the 19.7% its residents suffered in 2008. At present, Vietnam is suffering very high inflation, and it stood at 18.1% in December 2011.
Yes, there are a lot of different figures there, but it is important to understand what they mean. In real terms, the higher the inflation rate, the less you will be able to buy with the money you have available. $100 at an inflation rate of 18% will buy you today what would have cost you $81 yesterday – I am being figurative, but you can see what I mean.
As inflation rises, it becomes ever harder to keep your money growing at the same rate as prices, so your spending power is going to fall. If you cannot get a return on your savings or investments that will beat inflation, especially after you have paid tax, you are going to be losing out financially.
But even though you are unlikely to find returns on your investments that will reach the heights of 18%, the more you can generate for your money, the less impact inflation will have.
This is why it is vital to take advice on the best way to grow your portfolio, whether you have the money in cash or investments, as this will keep you closer to maintaining, and hopefully exceeding your previous spending power as time goes on.
But that is not the whole story. Although a nation’s inflation rate is defined specifically by what is put into the ‘basket’ that its leaders decide should be there, we all have our own inflation rates – and they depend specifically on what we are buying on a regular basis. Some prices will rise, such as commodities that are running out, while others will fall – electronics particularly are getting cheaper as time goes on.
If prices are rising for, say, coffee in a region, then it is vital to look for ways to cut our costs, such as buying a different, cheaper item if you can, or choosing an alternative to the product you usually buy that is on sale. While this may sound obvious, and something you would look to do anyway, this is one of the most effective things you can do to help reduce your own personal rate of inflation.
But really, you need a two-pronged attack – make the most you can on your savings and investments, and cut as much as you can on your spending costs. It sounds like simple budgeting doesn’t it? Well there is a good reason for that, it is.
First published in Asia Life
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