WHY
INFLATION IS ERODING YOUR SAVINGS
The basic principle behind
inflation is that as the money supply increases, so too does the relative price
of goods and services. A common sentiment for children to hold is “why can’t
we all be millionaires, then there would
be no poor people”, or something to that effect. The answer is inflation (Past Future Tense).
In theory we could all be millionaires
(Future Continuous Tense), but this would drive up the
price of consumer goods to reflect the increase in money supply, essentially
balancing out society’s new found wealth. (Past Future Continuous Tense)
The
above scenario is an example of hyper-inflation, where prices rise in an
exceedingly rapid fashion. In reality, most modern countries with stable, or
fairly stable, economies have an inflation rate in the low single digits (Past Perfect Tense ). When using New Zealand as an
example, we have recorded an inflation rate of a little below three percent
since the turn of the century (
Past Perfect Tense ), never veering too far from that
mark in any one year. For the average citizen what this means is that as the
amount of New Zealand currency increases by three percent annually, the price
of goods and services follow in order to keep pace. In essence, you would have
to be earning three percent or more in additional income each year in order to
avoid a decrease in your buying power ( Past Future Perfect Continuous Tense).
The
example of wage parity shares a common connection with how savings are affected
by changes in inflation. Your savings must also increase at the same rate of
inflation each year (Future
Continuous Tense) in
order hold their real worth. If prices are rising annually but your savings
remain unchanged (Future
Continuous Tense), you
are able to purchase less with the same amount as you were the previous year (Past Perfect Continuous Tense). This is why keeping your
savings hidden under a mattress is not the smartest investment strategy ( Past Perfect Continuous Tense), even if you ignore the
security issues (Simple
Future Tense). What
the vast majority of us do instead is deposit our savings into the bank (Past Perfect Continuous Tense).
Banks have made for sound investments(Future Perfect Tense), seeing as the
deposit rate has traditionally been above the inflation rate(Past Future Continuous Tense), at least
in New Zealand. This means that your savings are growing faster than
inflation(Future Continuous Tense),
effectively increasing the value of your deposit within the marketplace(Present Continuous Tense). The problem
is, following an increase in GST, inflation has risen above the interest rates
offered by banks. It is still a far safer investment than storing cash under
your mattress, but not as secure as it once was.
Modern investors need to more carefully consider
their options when structuring a portfolio(Simple
Future Tense). Of course the key advantage of a bank is that you don’t
risk losing your investment(Future
Continuous Tense), but if your value is being eroded from year to year
then you have to ask yourself what the point is(Future Continuous Tense). The best thing to do is speak to an
Investment Adviser, who can help sort through your options and minimise the
impact of inflation upon your savings(Future
Continuous Tense).
