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Outperforming Inflation

illustration of woman analyzing financial line graphic

Good day

The cost of living continues to sky-rocket. Food prices are over 11% up over the past year. Fuel is 45% up over the past year. Inflation is at a 40-year high in the UK and US. Many are battling to make ends meet. 

Against this backdrop, I want to look at the impact that INFLATION is having on YOUR MONEY and show you how you can counter it.

Do you understand what inflation is? Are you aware how it is affecting you?  

What is inflation?

Inflation has been defined as being the rate at which the general level of the price for goods and services in an economy is rising, and, subsequently, how the purchasing power of money is being eroded over a period of time.

In a nutshell, inflation is how the price of goods increases and how the value of your money devalues.

So, we can say that inflation decreases the value of money over time. 

For example, if you have R100 of your currency in your pocket today, that R100 will be worth a lot less one year from today if you just keep it in your pocket.

What effect does inflation have on you?

If you bought goods for R1000 today, and inflation is 6% pa, and in a year’s time you went and bought the identical basket of goods, you would have to pay 6% more i.e. R1060. 

In other words, the original R1000 is now only worth R940 of today’s money.

Inflation increases the prices of goods and services over time, effectively decreasing the number of goods and services you can buy with the same amount of money in the future.

If your earnings remain the same but inflation causes the prices of goods and services to increase over time, it will take a larger percentage of your income to purchase the same goods or services in the future. 

If you bought a trolley full of groceries 10 years ago, you would basically have to pay double for the same goods today. Or, put another way, you would only get a half-full trolley of groceries for the same amount of money, 10 years on.  

The rule of 72 

The “rule of 72” is used as a guideline to determine how long it will take for the purchasing power of money to halve at a given inflation rate.

Example:

  • If the inflation rate is 8% p.a. at a given period, it will take 9 years for the purchasing power of your money to halve (i.e. 72 ÷ 8 = 9) 
  • If the inflation rate is 4% over a given period, it will take 18 years for the purchasing power of your money to halve (i.e. 72 ÷ 4 = 18)

A few examples of how inflation impacts your cost of living:

We all know how the cost-of-living increases over time. 

Just look at these examples…

  • In 2002, it would have cost you around R150 to fill your tank. Now 2 decades later, it costs over R1 500 to fill the same tank. That is a 10-fold increase in the price of fuel over 10 years. 
  • A loaf of bread would have cost you under R8 in 2012. Now, 10 years later that same loaf of bread costs you around R18.
  • If you have a R1 million bond, your monthly repayment would have increased by R1250 p.m. between November 2021 and now (August 2022) 

To put this in perspective, the cost of living has more than doubled over the past 12 years. Has your income doubled over this time? If not, even if you have only maintained your current standard of living, you will be battling to make ends meet.

What about your investments? Have your investments at least doubled over the past 12 years? If not, your capital is being eroded against inflation. 

Due to inflation, the cost of goods continues to rocket upwards.

Inflation effectively decreases the value of money over time. To mitigate this decrease in the time value of money, you need to invest the money available to you today at a rate equal or higher than the rate of inflation.

How does inflation affect your savings and investments? 

If you were to save R100 per month for 5 years (at 0% interest) you would have saved R6000. That is fine if there was no inflation, but we all know that this will never be the case. If inflation averaged 6% pa over the period, you would still have R6000 saved, but it would only be worth R5054 of today’s money (remember in our example inflation has averaged 6% for 5 years). 

In other words, the R6000 you will have saved will only be worth R5054 in today’s terms. 

So, although you have saved the money, you will only be able to buy R5054 worth of goods and services. 

So how can you overcome the effects of inflation?

It is vital that your investments have the ability to generate an inflation-beating return. 

Back to the rule of 72…

Example:

  • If inflation was at 6% p.a., you would need your investment to double every 12 years (ie 72 ÷ 6 = 12) to keep up with the rising cost of living. 
  • If you invested your money in a Bank Savings Account and earned 4% p.a., it will take 18 years for money to double (i.e. 72 ÷ 4 = 18). You unfortunately would have eroded your capital in real terms by 2% per year.
  • If you invested your capital in a growth investment that earned 9% p.a., it will take 8 years to double your investment (i.e. 72 ÷ 9 = 8). You would then be growing your money in real terms by outperforming inflation by 3% per year.

Note:

The average Cautious Balanced Unit Trust or Mutual Fund is a well-diversified “All Weather Portfolio” that should generate inflation plus returns over the longer term. While these funds can be volatile and even give negative returns over the short term, the average Cautious Balance Portfolio has generated over 10% per annum over periods of 10 years and longer.  

I would encourage you to build up savings in a bank account for short-term contingency funds. This will ensure that cash flow is available for when the storms of life hit, or when costs escalate fast – like we are experiencing now. But I would also implore you to set part of your money available for investment aside over the longer term so that you can generate real growth to future your future goals and dreams. 

Money invested in a bank account rarely outperforms inflation. If you are seriously looking to grow your money and ensure that you do not erode your capital against inflation you need to consider growth investments.

The difference…

I heard a great story that shows the importance of investing in growth investments that can generate real inflation-beating returns over time.   

  • If you had R6000 in South Africa in 1982, you would have had enough money to buy a brand-new Ford Cortina.
  • If you have invested the R6000 and only received an inflation return on this investment, your capital would have grown from R6000 to R180 000. This would give you enough money to buy a small entry-level car like a Kia Picanto. 
  • However, if you have invested the R6000 in a growth investment that had the ability to generate returns way ahead of inflation over time, you would have generated explosive growth. 
  • In fact, if you had invested your R6000 in 1982 into an equity unit trust fund, your investment would have grown to around R2.3 million by now. This would have been enough to buy a home in a middle-class suburb. 

The difference between investing your money or just leaving your money in a bank account over the long term could be huge. As per our example, it could be the difference between having built up enough money to only being able to buy an entry-level car, as opposed to a nice family home.

“He who gathers money little by little makes it grow.” (Proverbs 13:11)

“Ship your grain across the sea; after many days you may receive a return. Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” (Ecclesiastes 11:1-2) 

By investing over the long-term within a diversified all weather cautious balanced portfolio, you should be able to generate explosive growth well ahead of inflation. Consider investing in an investment portfolio that has the ability to generate a return in excess of inflation to ensure that you do not erode your capital in real terms.

If you are looking to grow your money in real terms and build wealth, I would suggest that you get advice on how best to construct your investment portfolio to help you achieve your unique personal goals and ensure that your investment portfolio aligns with your specific goals and objectives. 

You also need to be patient and stick to your long-term plan. 

With the right asset mix, you can ensure that you have sufficient money set aside for short-term needs, while also ensuring that you have money invested in growth investments that can outperform inflation and generate good growth over the long-term so that you can achieve your long-term future goals and dreams. 

“The wise man saves for the future, but the foolish man spends whatever he gets.” (Proverbs 21:20)  

One last thing…

It is good to set goals, set up an investment strategy, and work towards your dreams, but I want to encourage you to commit your plans to God. Please do not get overly fixated on making money. Rather set up the correct investment strategy and live to please God.   

“Commit to the Lord whatever you do, and he will establish your plans.” (Proverbs 16:3)

Don’t trust in money. Trust in God.

“Do not wear yourself out to get rich, do not trust your own cleverness.” (Proverbs 23:4)

He is in control. He is our provider. Rest in him. 

Your relationship with God is much more important than your money issues.  

“What good will it be for someone to gain the whole world, yet forfeit their soul? Or what can anyone give in exchange for their soul?” (Matthew 16:26)

There is more to life than chasing after money and material possession. 

If you are not in a relationship with God, I implore you to surrender your life to Jesus. 

God saw that man was separated from Him, so He sent His Son, Jesus, to pay the price for you and me on the cross, so that we can come into a relationship with Him. You can start a walk with God, not because of what you do, but because of what Jesus did. This relationship ensures that you and I do not need to face life alone, and this relationship continues into eternity.

Today you can invite Jesus to be your Savior. 

Let us pray: Father, I give you my life, along with my dreams and desires. Lord Jesus, I ask you to be my Savior. Thank you for the price you paid on the cross for me so that I can be set free. Please forgive and cleanse me. I put my life in your hands. Please guide me along the best pathway for my life. In Jesus’ name. Amen.

If you want to start or restart your walk with Godclick here to pray a simple prayer we have set up for you.

In closing…

Invest in your walk with God and invest in an investment portfolio that can generate inflation plus growth over the long term. But, above all, hold onto God. 

Happy investing. God bless you. Clinton.

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