# What Is Inflation and Why You Need To Make Your Money Grow

Posted by Fitz Villafuerte under General Information, Personal Finance on February 6, 2008

A man goes home to his wife from the office bearing some good news. His request for a salary increase was approved today by his boss. They decided that a celebration was in order.

It’s been a year since they’ve eaten at the posh restaurant in downtown Manila, so they decided to have dinner there. Looking at the menu, they noticed how much the prices of the food has increased since their last visit.

Nevertheless, they still ordered their favorite meals and enjoyed the night, talking about the new things they can buy and the extra luxuries they could now afford.

What the couple doesn’t know is that, although the husband’s income has been augmented, their purchasing power did not necessarily increase the same way.

Let’s say for example that the man’s monthly salary last year was P25,000 and his new salary this year is P27,500. That’s a 10% increase in his nominal income. However, if the prices of commodities has increased by 8.6% from last year due to inflation (which happened in NCR last 2005), then his real income actually increased only by 1.4%.

This means that eventhough the husband will be getting an extra P2,500 per month, if they take into account the devaluation of the Philippine Peso, he will be in fact, only receiving a mere P350 extra per month. Why? Because the things that they could afford to buy with P25,000 last year will now have a tag price of P27,150 (25,000 multiplied by 1.086).

These simplified computations clearly show how inflation affects our income and our daily lives.

To define, it can be said that inflation is an increase in the prices of goods and services in a given economy over a period of time. This means that if an item costs P100 last year and if the inflation rate from that period to the present time is 12%, then the same item will now have a price of P112.

There are many causes why the prices of commodities increase, there are a lot of theories and resources which you can read to know exactly these reasons. What is important for you to understand now is that because of inflation, our money is continuously shrinking or losing value.

Inflation hurts people particularly those in fixed incomes like the elderly and those whose income isn’t indexed to inflation. They lose a part of their purchasing powers because their cashflow remains constant while their cost of living increases.

Employed individuals, despite receiving constant salary increments, are hurt because there is a time lag in compensation adjustments. By the time they receive higher nominal income, it has already been months since the prices of commodities went up.

Do you have a savings account? What is the rate of interest per annum that your bank is giving you now? Chances are it is just 1%, maybe lower. It is usually less than the inflation rate from last year.

What does this mean? It means that your money is slowly shrinking in value. Your hard earned income which you are letting sleep in the bank is losing its power to buy you the things you need in the future.

What can you do to cope with inflation?

1. Get salary increases or switch towards higher paying jobs as often as you can.

2. Lessen you expenses and find cheaper alternatives to your costs of living.

3. Learn how to invest and make your money grow.

Among these three, I consider the last one as the best solution to survive inflation; simply because it is what rich people do. They invest their money in businesses and assets which continuously gives them income rates much higher than inflation rates.

Personally, I am fortunate to own a business which continuously grows by at least 5% in profits every quarter. The inflation rate for 2007 was only 2.6% in Manila. This means that I was able to cope with inflation last year.

Will this year be any different? I don’t know. This is why I still continue to find ways to earn money so I can invest more. I continually educate myself about money and investments so that I can find more ways to grow my money and have more passive income.

References:
McMahon, Tim. “Who Does Inflation Hurt Most?” April 17, 2007.
Philippines National Statistics Office. “Index of Price / Inflation Statistics”. February 5, 2008.
Wikipedia, The Free Encyclopedia. “Inflation“. February 5, 2008.

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### 26 Responses to “What Is Inflation and Why You Need To Make Your Money Grow”

1. Kazza says:

The level of inflation also fluctuates depending on how you spend your money. High net worth individuals can have a much higher rate of inflation. In the UK the CPI is 2.1%, but according to research done by Coutts Bank in its Coutts Wealth Inflation Index, the rate of inflation can be as much as 10%, depending on their personal circumstances.

2. Fitz says:

Hi Kazza,

You’re right. In a nutshell, this means that luxury items tend to have higher inflation rates than basic consumer products.

So, the more you regularly spend on luxury, the higher the inflation rate you experience.

Thanks for the comment and the additional information.

3. […] I consider time as a neutral entity, which means that it can be our friend or our enemy. Our personal perception determines which side it is at. Try to evaluate your beliefs and discover how time relates to your life, specifically in your finances. Is time making your money grow, or is it slowly devaluating its worth? […]

4. […] results are not realistic because it doesn’t take into account other factors such as inflation; it nevertheless gives us a strong vision of what’s possible for us. By estimating our […]

5. bronee says:

hi fitz,
i have a question 2 yrs ako di nakapag deposit sa bpi account ko siyempre automatic my account has been classified as dormant yun.last week nung maghuhulog sana ako ang sabi ng bank teller may monthly service of php 200.00 will be charged on my account while it remains dormant. Once the account reaches zero amount,your account will automatically be closed.

tinanong ako magwiwithdraw ba ko or continue ko yung service sa kanila? isip ko sayang kasi savings account ko yun. hard-earn money ko yun kahit matagal kong di nahulugan. siyempre tuloy lang ang deposit ko sayang for my future.kaya resume pa rin at reactive ang account ko na parang-email na hindi nabasa for a long period.

Sayang din naman kung sisimutin lahat ng bangko mga pinaghirapan for their own business interest.

Ask ko lang should i continue to put my savings in the bank? meron din me savings from other banks,i have my sss for voluntary contribution,life insurance,mga alkansiya for personal savings,emergency funds,event or occassion savings just in case na dumating ang b-day,monthsary,aniv,xmas at iba pang event.they are labeled and categorize in various boxes and envelops.para akong bumbay may kaha de-yeo/vault sa bahay.

Aside from the banks,mutual funds,equity bonds,treasury bills,govt funds where can i put my savings?

pagsa stock market higher ang yields,sa treasury bills and bonds i need hundred thousand para makabili nun! i don’t have a hundred thousand personal savings sa bank and in my vault. i only i had coins and few paper bills.

thank you God bless

6. Fitz says:

Hi bronee,

First, I think the reason why the bank is charging you P200 per month is because the money left in the savings account was below their maintaining balance. Personally, my suggestion is just to withdraw everything and open a new savings account, perhaps in another bank.

Secondly, I commend you for having a lot of savings. If you’re thinking of investing them in some financial instruments, I suggest that you read another article of mine, A Beginner’s Guide To Investing.

Hopefully, this will help you decide what to do with your extra money. Good luck and best regards.

7. bronee says:

thanks fitz,

what about putting my money from the bank to instruments like philhealth, caritas and other health institutions? okay ba na move yun?

kung MLM naman? na trauma na ko kasi na swindle 100k ko ng Baladjay group of companies. I caution myself from MLM scammers.

8. Fitz says:

Hi bronee,

All those are good as long as you invest in established and reputable institutions. Furthermore, if you want to invest in MLM, then I suggest that you read an article I wrote here: The Basics of Multi-level Marketing.

9. Lee Angelo says:

Hi Bronee,

Maybe you can try opening an online stockbroker account as an alternative investment instrument compared to a bank savings account, which normally gives you only 0.75% to 1% interest, not to mention the Php30,000.00 minimum initial deposit to open a new account (in the case of Metrobank).

As far as I know, on-line stockbrokers doesn’t have a minimum maintaining balance (or if it has, it won’t be like Php10,000.00 monthly minimum). Futhermore, online accounts have cheaper commission fees.

As for my pick, it would be Citiseconline because of its lowest opening requirement and lowest commission too (0.25%)

Listed below are some online brokerage in our country:

AB Capital Online – Php50,000.00

Citisec Online – Php20,000.00

Btw, I don’t work for Citiseconline. ^_^

10. Lee Angelo says:

Btw, Citisec Online accounts starts at Php25,000 minimun.. sorry for the error.

11. […] is such a thing called inflation. And from observation, low risk investments, more often than not, give yields that are lower than […]

12. […] If you’re like this, then try to be more proactive with your finances. The cost of living is continually rising nowadays and I believe that having a clear understanding of your financial status will help you […]

13. […] savings and time deposits are the best way to beat inflation It’s good that most people know what inflation is but one should realize that savings and time deposit interest rates are ALWAYS lower than the […]

14. Ingrid Bautista says:

Hi, Fitz.

Thanks. You spark our interest to improve our financial status. Would you know how to invest savings for my eight year old daughter? We have no plan of spending it. We plan to hand it to her when she’s prepared to have her own business or after college.

I heard from a radio program that this certain DJ invest her hard-earned my with help from Phil equity. Stocks sounds scary to me since I have no background. Mutual fund they say will just be equal to inflation in the future. Any suggestion perhaps?

15. Fitz says:

Hi Ingrid,

Maybe you should consult a financial planner to know the best options for you.

Also, you should know that investment risks in the stock market are much less if your time horizon is long. Phil equity and most, if not all other mutual funds out there which invests in the stock market have shown positive returns in the last 10 years.

Cheers,
Fitz

16. […] Low Risk Investments So far, you’ve covered your very immediate future. At best, no financial emergency will be bad enough to break you. And because of that, it’s now time for you to face a money saver’s greatest enemy – inflation. […]

17. […] receive is acceptable to you. More importantly, determine if the profits will be high enough to cover for inflation. Finally, whatever length of time and level of risk you decide to take, be certain that under the […]

18. Benjie says:

I’ve been reading your articles and I find them very helpful. Hope you don’t mind me asking, how do I know the current inflation rate? Where do you get such information?

19. […] Saving vs Investing Next, I talked about the differences between saving and investing. I emphasized that even though you don’t lose money in a savings account, it does lose some of its value (or purchasing power) because of inflation. […]

20. Ina says:

Hi!

I’m thinking of investing in MF? What’s the best company to invest in? I’m looking at sun life or philequity fund, but found that philequity’s return for a 3year term is higher than sun life prosperity. Is this the correct way of looking at it?

I’m a low risk investor. I just don’t want to keep my money in the bank. I have no job at the moment, but I do have savings good for 6 months.

By the way, how and where can I get in touch with a good financial planner?

Thanks!

21. […] was until I learned all about inflation, and realized that if I do not invest, then I’m simply setting myself up to be both safe AND […]

22. […] as time goes by, your cost of living increases – you get married, you have kids, inflation happens, etc. When these occur, your emergency fund should adjust accordingly. By continually adding more […]

23. […] not give maximum returns for the long-term. With the relatively small interests, an annual average inflation rate of 4% to 6% will only eat up what you will earn from these […]

24. […] because of inflation, what they don’t realize is that they’re actually losing money by leaving their cash in […]

25. […] more interesting stuff about money, like how to beat inflation and become wealthy, by subscribing to Ready To Be […]

26. […] love working with spreadsheets, then you can create one and project how much exactly that would be. Don’t forget to consider inflation, which you can safely set at 4% per annum, in my […]