This is the full excerpts of the popular #MoneyMasterClass series conducted by Tunji Andrews. Follow his handle @TunjiAndrews every Saturday for the live tweets.
How Inflation Affects Your Finances
So I had to reschedule the class due to the DM harassment from footie fans
Topic: How Inflation Affects Your Finances
So, from the basics:
In simple language, inflation means rising prices. And shows in the increase in cost of living
It’s the rise in the general level of prices of goods and services in an economy over a period of time
As prices rise, the levels a unit of currency can buy becomes fewer. Thus, purchasing power of money will be reduces
Now, inflation is a daily rise(or fall), captured monthly. With the real value of money lost daily along with inflation
A low inflation rate is beneficial to a country but, high, zero or negative inflation is considered as bad
Well, inflation is like body heat. Just enough is what’s needed. High temperature is a fever, and low shows shock
So how’s it measured?
Well, we us a price index(CPI), Which is a selection of a market basket of goods and services
In Nigeria, Every month, 10,534 informants spread across the country to collect price data for the CPI’s computation
And as of today, the market items, in our basket currently comprise of 740 goods and services regularly priced
Don’t want to bore you with the methodology or statistical processes, but prices are collected, averaged and computed
Thus the items in our basket and seeing the price variations that occur with them across the nation, helps predictions
Methods generate a 3774 item indices for all states. Yelding 85 classes, 48 groups, reclassified into 12 Divisions
Under food & non alcoholic beverages
Bread and cereals
Milk, cheese and eggs
Oils and fats
Under alchoholic beverages, tobacco and kola
Under clothing and footware
Cleaning, repair and hire of clothing
Under RESTAURANTS AND HOTELS
I’m sure we now get the drift?
In an inflationary environment, a tin of milk which once sold at less, then N1 in 1985, today sells at over N120
For investors the key to making money is to hold investments that increase at a rate in excess of the rate of inflation
I know a plot of land sold in Lekki in 1991 for N10k, (a two and a half plot of land) which now sells for N135m
Now let’s observe
Inflation rate is 8.5%(March)
Savings account rate is 3.8%
Which means you’re actually losing money
Money is a store of value. And it’s value is the number of goods and services it can buy per time
Thus, Money kept under your bed for a month has actually lost some value after a month.
Keep money working or….
Problem is, as prices rise, fixed income earners can’t purchase the same number of goods and services over time.
So, while the rich see inflation as an opportunity to increase their portfolio
The poor(who are unaware)
Die from it
Its especially worse for retirees and others who may have a fixed income. Last month’s salary is always of more value
If you don’t find new income
Or have investments in excess of inflation
You’d be poorer next month
Inflation can also make the prices of domestic products less competitive when compared to other countries’ prices
So, when comparing Nigerian goods affected by inflation with goods from a stable Asian economy. You know who looses
So, what are our notes?
1. Inflation in moderation is good
2. It can be bad or good depending on how you approach it
A few investments are viewed as hedges against inflation. Real estate, gold, oil, stocks and inflation-indexed bonds
Looking at Real estate, rising prices increase the resale value of the property over time + rent goes up over time
The income generated by an investment property keeps pace with the general rise in prices across the economy
Gold, like oil goes up & down with global volatility. But it’s volatility is in an upward trend over a long period
So, as you invest….
Factor inflation into your considerations