Defeat Inflation!Posted on November 25th, 2012 under Wealth of Advice
Francisco J. Colayco
Melchor V. Cayabyab is a trainee of the Colayco Foundation as a Financial Wellness Advocate. He is an award-winning teacher in Manila and President of the KAGURUAN Center for Empowerment.
I gave him a chance to write about what he learned regarding personal financial matters. If anyone wants to share an article, I am ready to include it in my column.
Lower Prices! Higher Wages!
By Melchor V. Cayabyab
As usual, this was the battlecry of different worker’s organizations during the last May 1 rallies as the prices of petroleum have continued to rise. The rising prices have a “domino effect” on the price of other goods. This of course has prompted calls for higher wages and transportation fare.
Why is Inflation Such a Serious Concern?
Inflation is the term in economics, which refers to the rising prices of goods. As prices rise, our money could buy less than what it used to buy. For example, if rice costs Php20/kilo then your Php100 could buy 5 kilos. But once the price of rice increases to 25/kilo, then your Php100 can only buy 4 kilos. This is the reason why we carefully watch the movement of price.
This effect of inflation is the primary argument used to demand higher wages and transportation fare. Workers and public vehicle drivers want to recoup their losses caused by inflation. But raising wages and transportation fee will also cause the prices of other goods to rise, thus triggering a domino effect! In the end, this is will become a vicious spiral of rising prices!
Who will be affected?
If you are a fixed income earner and you are not sure when your salary will be raised, you are affected! Your income does not change yet you can buy less of what you used to buy due to inflation. It will be difficult if your income still does not increase.
Savers will also be affected. You keep on saving money while mistakenly thinking that your savings increase as time goes by. But if inflation is at 10%, your ability to buy is decreased by 10%. The savings which you wanted to accumulate is really decreasing in value due to inflation!
Lenders are also affected! The returns on their loans will be lower compared to before because they can buy less with it. Worse, the inflation rate may be higher than the interest of their loans. If this is the case, the business might be devastated!
“How can we defeat Inflation?”
According to the book PISOBILITIES by Francisco J. Colayco, the annual average inflation rate of our country as 5.5%. This means that our purchasing power decreases by 5.5% every year. To defeat this, our income must increase by more than 5.5%. If our income increases at the same rate as inflation, then at least we are able to cope up!
This is why it is important to monitor the inflation rate.
If you are lender, you must take into consideration the inflation rate when setting the interest rate.
If you are a fixed income earner, you will have to work harder and look for a sideline to increase your income. Do not rely on salary increases. Because while inflation is like an inevitable typhoon, salary increase is just an occasional drizzle.
Those with savings have a good chance of beating inflation because they have the means to invest! There are so many investment instruments like mutual funds where they can put their money. We only have to carefully study these and invest on instruments with returns that are higher than the inflation rate. We can learn this by reading books and attending seminars.
Some of the excellent materials available are the books of Mr. Francisco Colayco. It would also be helpful to attend the INVESTability seminars of his foundation.
We can defeat inflation! We only need to invest correctly!
The advice of Melchor is based on sound principles. I would like to add that there will be those who believe that Mutual Funds are too risky and they could lose all their savings if they invest in mutual funds. It is true that there are risks in investing in Mutual Funds. However, these risks are mitigated if your investment is for the long term like 5 or more years. You should not put all your savings in any one investment. Therefore, when you invest in mutual funds, you should be investing only part of your savings. Since mutual funds accept only a minimum of P5,000 as a start and P1,000 additional investment each time, your savings should preferably be more than this. However, if you are still young, and can take more risk, you could start putting your initial savings in mutual funds on a long-term basis. It is unlikely that you will lose your savings but if the unlikely happens, you will still have time to recover.
For our seminars, Call 6373731 o 6373741. Also visit www.colaycofoundation.com.