Do you ever get the feeling that everything is getting more expensive? That’s not just a feeling – they really are! It’s all down to a thing called inflation.
Inflation = Prices going up
Inflation occurs when there is an increase in price of goods and services across the board. Here’s an example of that in action:
Inflation is actually normal – until it’s not
Did you know inflation is always at work? It’s usually driven upwards slowly and steadily by production costs, demand and a country’s economic policy.
However, sometimes things happen that cause inflation to spike – that’s usually when it becomes a hot topic and everybody starts talking about it. Modern economies are like spiderwebs, where everything is interconnected. When everything is interconnected, a small disruption somewhere can have globe-spanning effects.
Right now, a few global factors are intensifying inflation rates:
- COVID-19
Both the pandemic and the subsequent lockdowns have caused major disruptions to the production and distribution of goods.
- Rising Demand
Many countries have entered the endemic phase all at once, creating a huge spike in demand while there’s still a big slump in supply.
- Global Events
Parts of China, a major producer of goods, are still in lockdown, while the war in Ukraine has interrupted supply lines in Europe, making energy and raw resources cost more.
As costs inflate, your cash can’t go as far
All those reasons aside, what does inflation mean for the average Malaysian? Well, the most obvious impact is that you get less bang for your buck. As manufacturing and service costs go up, manufacturers raise prices, and as the prices go up, your purchasing power takes a hit. Not good!
So what can you do to beat inflation?
Inflation can’t be stopped altogether, but there are some things within your control to reduce inflation’s impact on your finances:
- Upskill to earn more
Upskilling yourself and excelling at your job increases your demand for more pay and performance bonus, keeping you ahead of growing costs.
- Spend wisely
Comparing prices and tracking your expenses can help you reduce spending and limit the likelihood of picking up unnecessary debt.
- INVEST
Investing a part of your income helps protect its value, and may even earn you a passive income. Naturally, the more you’re able to invest, the bigger the potential of your returns.
Here’s the difference investing can make
Although the returns may fluctuate from year to year, at the end of ten years investing has kept the value of your money way ahead of inflation.
Disclaimer
- Inflation rate is 4.4% as of Jul 2022 (Source: https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=106&bul_id=c0hsU3lYL3g3R2Y0aXFrWjdMNU5CUT09&menu_id=bThzTHQxN1ZqMVF6a2I4RkZoNDFkQT09)
- Savings acocunt rate is calculated by taking Malaysia's average deposit interest rate from 2007 to 2020 in Malaysia (Source: Statista 2020)
- Investing returns are calculated based on S&P500's last 10 years annual return (Source: Goldman Sachs 2020).
- All calculations assumed a one-time deposit of RM100 for the first year, which then compounded annually for the next 10 years.
