Implications Of Inflation


To create wealth in the long term it is important to understand how to work with inflation. Because no matter how hard you save money, if you don't invest it wisely, you will lose out in the long term. Inflation will erode your savings as surely as night follows day. Even investing in money market funds is better than nothing!

The bad side of the coin:
Because of inflation, every year your money is worth less and less. Not only that, but it is a compounding effect. If you take R1000 this year and inflation erodes it by 15% or 10% or 7% every year, let's look at what that R1000 will buy you in today's terms at every year for 4 years into the future.

YEAR NET PRESENT VALUE
  15% 10% 7%
1 R 1,000 R 1,000 R 1,000
2 R 850 R 900 R 930
3 R 723 R 810 R 865
4 R 614 R 729 R 804

What this means is that if a consumer does not ensure that any spare money they have available is invested in an inflation hedge, in the long term they may as well not have bothered working to earn that money in the first place, since after 10 years the money is pretty much worthless in today's terms.

The good side of the coin:

There are financial investments around that can keep up with inflation, and even beat it, for less financial risk than many people assume. It is relatively easy to invest in these asset classes and generate real wealth. In fact, inflation can be the friend of an investor, because without this dynamic, there would be less opportunity for wealth creation.

In South Africa, one asset class that outperforms inflation consistently in the long term is property or real estate. Intelligent investment in property even during quiet times in the South Afrincan property market is still one of the best financial investment choices around.

To Summarize

It is imperative that the man in the street uses an inflation hedging investment in order to ensure that his savings are not eroded by inflation in the long term.

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