Did you know that the value of your money will be worth half its value in approximately 11 years’ time? And the unfortunate thing is that you cannot do anything about it thanks to the silent “killer” causing havoc in our economies called inflation.
Inflation is a general increase in prices and fall in the purchasing value of money. Every central bank’s main purpose is to control price stability, therefore a Monetary Policy Committee is appointed, mainly consisting of six people, to decide on the repo rate using all the information available. Inflation is targeted between 3-6% in South Africa and it is been left unchanged at 6.5% for several quarters.
To determine how inflation erodes the value of money the “Rule of 72” is used to give estimation on how long will it take for your money’s purchasing power to halve.
The formula is:Years =72 / inflation rate.
Since South Africa’s inflation rate is currently 6.5%, it will take 11 years for your money’s purchasing power to halve.
The “Rule of 72” is also used for various situations that have a growth rate. For instance, if the fixed deposit “investment” from your bank offers you 6% on your investment then it will take 12 years for your “investment” to double your money. Therefore, knowing that due to inflation the value of your money would half in 11 years’ time, would you still consider the 6% rate on the fixed deposit as a good form of investment? I don’t think so!
The Rule of 72 assists us in making financial estimates by asking ourselves important questions in terms of hedging inflation by looking for investments that outpace it.
We all want to be smart with our money by making it work for us, but what type of savings and investments would be ideal in times like these?Personally, I’m risk loving and always seek ways of getting better returns, so I’m probably not the most qualified person to give advice (lol). However we live in fun times where cryptocurrencies and foreign exchange markets are a thing, so there is nothing stopping us millennials from learning how it works and taking advantage. Investing in stocks, bonds, property and sustainable businesses has been proven for years as being the best form of investments.
Therefore next time you are offered a fixed income policy, fixed annuities, education plan for your 5 months old child, or any form of fixed “investment”, please consider the Rule of 72 to guide your decision.
ReferencesBresiger.G. (2018).Combating Retirement’s Silent Killer: Inflation. Investopediahttps://www.investopedia.com/articles/retirement/07/inflation-effects-retirement.aspHange.L. (2017). Hawks and Doves of Inflation. Awaited Opinion.http://awaitedopinion.blogspot.com/2017/10/hawks-and-doves-of-inflation.html(2018).The buying power of money: Why 72 is an important number in business. Way to Wealth.http://waytowealthpro.com/blog/buying-power-money-why-72-important-number-business(2018). How does inflation affect fixed-income investments? Investopedia.https://www.investopedia.com/ask/answers/021615/how-does-inflation-affect-fixedincome-investments.asp