Updated: February 14, 2023
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 have 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 have 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 even though 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 cash flow 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 your 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 that 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 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.
McMahon, Tim. “Who Does Inflation Hurt Most?” April 17, 2007.
NSO. “Index of Price / Inflation Statistics”. February 5, 2008.
Wikipedia. “Inflation“. February 5, 2008.
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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.
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.
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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
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.
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.
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.
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
2TradeAsia – Php25,000.00
Btw, I don’t work for Citiseconline. ^_^
Btw, Citisec Online accounts starts at Php25,000 minimun.. sorry for the error.
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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?
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.
Lastly, a suggestion would be to talk to your bank and ask about setting up a trust fund for your daughter.
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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?
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Do not forget the evil of central banking. The “money masters” manipulate a countries currency supposedly “for the good of all.” Personally, I believe there are many nefarious reasons for currency manipulation going on behind the scenes that the majority of citizens will never know or understand. Please allow me to share a short idea with you of a time before central banks and a time when the currency of my country (USA) was linked to solid gold. There was a time in the United States that a gentleman could walk into a tailor and purchase fine mans suit including jacket, pants and vest with a $10.00 dollar US gold coin. Perhaps there would even be enough left to visit the haberdashery shop to purchase some accessories. Fast forward a hundred + years and that same $10.00USD gold coin, converted to paper money, will still purchase for you a great suit of clothing. A $10.00USD piece of fiat paper currency printed by my Federal reserve bank will not even buy you a good shirt these days.
So what has changed? The same or even less labour goes into producing the wool or linen. Mechanized farming should actually make things cheaper. The labour to produce the cloth and then make the suit is the same or less. Again, with modern equipment, there should be a time savings. I believe the answer lies in the fact that fiat paper currency, manipulated by central bankers continuously loses value. Where did the value go? Into the pockets of bankers and other evil people (my opinion). They could not easily manipulate my US currency when linked to gold unless changing the underlying value of gold. This is why, my friends, gold has been and always will be a store of wealth. You can not eat gold nor is it easy to make small purchases with the solid metal but it does hold it’s value.
Paying me with more and more paper each year that loses value over time is much like gifting me a disease that will eventually kill me.