Our Weakening Wallets

There has been a lot of concern about the alarming rise of inflation. Inflation, in simplest terms, would be about the loss of the purchasing power of our money. Money’s value is really ascertained not so much by its absolute monetary value but rather on what that money can buy.

The government has ceded that the targeted inflation for 2011 will not be met due to some factors which is largely attributed to the increase in oil prices as a result of the Middle-East situation. DBS recently announce a much higher inflation forecast for the Philippines pegging it at 5.6 percent. In the past, we have been experiencing inflation rates at much lower and comfortable rates but no one can deny the increase in prices in the last few months.

Whenever inflation is being measured, the Consumer Price Index (CPI) is the barometer. CPI is the statistical measure of change in the retail prices of a fixed basket of goods and services purchased by an average household. In reality, the actual inflation we experience may be higher than what the CPI reflects. For instance, a big part of the budget of a typical Filipino household also goes to the education cost of their children. Even if the CPI reflects a low rate of say three percent, it does not mean the actual inflation one is experiencing is as such because the average inflation of tuition costs can go from eight to 12 percent.

There are two primary concerns to consider with regard to personal finance. On investing and on money management or budgeting – let’s briefly discuss both.

We invest our money because we expect it to grow for whatever purpose it may serve like retirement, capital, future expense, etc. Many investors focus on capital risk but ignore purchasing power risk. The growth of our investment should always be ahead of inflation, well at least in theory. When our yield is below inflation, we actually lose money because the money we have invested can’t buy the same amount of goods and services it could have afforded prior to it being invested. This situation is commonly referred to as “invisible risk.”

By taking a very conservative stand on your investment, you can avoid capital losses but you also incur losses in the purchasing power of you money – money’s value, after all, is not its absolute monetary value but rather on what it can buy. A quick scan of where most of the money in the country is being invested shows that it’s largely on short term instruments like Special Deposit Accounts (SDA) and Treasury Bills. The country is actually experiencing excess liquidity in its system; not a very ideal scenario since it may prove to be counter-productive for the economy.

On a more personal note, inflation’s impact is also felt in the short run by way of increasing cost in goods and services, thereby restricting our budgets. If left unchecked, inflation will cause our living expenditures to rise and our savings to decline. This situation will be okay assuming the increase in our income is greater than the increase in rising costs. Unfortunately, this ideal situation is not always so and if income does increase, costs usually rise earlier than income. In these challenging times, the first things that will suffer will be our ability to save.

Since increasing our income may not always be possible or it may take time, we can look at our expenses. A good cash flow is all about making more money AND spending less money at the same time. We really need to bite the bullet during these times and control our consumption so our budgets will proceed as we plan it. Actually, there is much wisdom in curbing consumption to combat inflationary pressures. The law of demand and supply pretty much dictates prices so if consumption is curbed, demand actually declines which can bring about an increase in supply and as the law dictates, price will actually go down (or at least prevented from rising faster) – well at least in theory. We need to be reminded to always respond properly with changes and not react with crippling fear that will result to needless worry.

“Therefore I tell you, do not be anxious about your life, what you will eat or what you will drink, nor about your body, what you will put on. Is not life more than food, and the body more than clothing? Look at the birds of the air: they neither sow nor reap nor gather into barns, and yet your heavenly Father feeds them. Are you not of more value than they?” – Matthew 6:25-26, ESV

Randell TiongsonRandell Tiongson is an advocate of Life & Personal Finance. He is a Director of the Registered Financial Planner Institute (Phils.) and has over 22 years experience in the financial services industry. For speaking engagements, financial planning, training and consultancy, write to randell@randelltiongson.com. To read his personal finance blogs, visit //www.randelltiongson.com.

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