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