Why you should invest to beat inflation
Inflation is the increase in the general prices of goods and services in the economy. This decreases the purchasing power of your money. Put simply, you need more money to buy the same amount of goods than you did in the past. For example, you notice how the price of coffee increases every year.
| YEAR | PRICE | INFLATION |
|---|---|---|
| 2019 | P100 | |
| 2020 | P105 | 5.0% |
| 2021 | P112 | 6.7% |
Why do prices go up in the first place? Prices can increase due to:
- low supplies such as shortages;
- high demand for essential goods and services;
- manufacturers and sellers anticipating inflation;
- increase in the purchasing power of consumers, or;
- the government printing money to fund its projects (as in the case of the US inflation).
Prices can go down as well, a case is called “deflation,”where inflation is actually negative. But in general, especially in the Philippines, the problem is usually inflation, not deflation.
Why inflation matters to you
Inflation is a useful benchmark to assess how much in terms of investment returns you should aim for to maintain the purchasing power of your pesos. If you do not invest, you might struggle to keep up with the rising costs.
For example, PHP 100 in 2019 is enough to buy you one cup of coffee from your favorite cafe. By 2021, the price of coffee has increased to PHP 112. So, your PHP 100 can no longer get you the same things you once could. We can also apply the same concept to other bills and utilities. If you had not invested your money in 2019, it’s safe to say that the money you set aside to pay for expenses then would be enough to pay for expenses in 2021.
What can you do to keep up with inflation? Invest!
The point of the previous example is that the net effect of inflation can be large and untenable over the long term. Thus, it is important to invest in assets to cover for inflation over the long run. People have traditionally viewed real estate and stocks as ways to beat inflation. The problem with real estate though is that it is not liquid, meaning, it is harder to convert to cash when needed without taking on big losses. On the other hand, stocks can be very volatile and to the uninitiated, unnerving and risky.
There are other kinds of considerations to keep in mind, but it would suffice to say that it is clear that one must have solid investments to counter the corrosive effects of inflation. The personal circumstances of the investor must be considered as well in such investments. Protect your assets against inflation by investing with Metrobank today. Head to earnest.ph to get started.
