Tom Henson is a senior consultant with Infinity Financial Solutions and one of KL's most sought after financial planners. Married with a young son Tom enjoys family life and is an ace on the golf course.
As a financial adviser, I’m always telling my clients just how important it is to save money for the future. Your future financial security depends on what you are saving now. If you want a golden, worry-free retirement, a first step on the property ladder or a university education for children, you are probably going to have to save for it.
Just as important as saving is the need to make sure that you are not losing out on the money you are squirreling away, because there is a silent thief which threatens to steal your savings and it goes by the name of inflation.
Inflation is an increase in the price of goods and services in an economy over a period of time. Inflation rates in the western world typically average three to four per cent per annum. That means if inflation is at four per cent at the beginning of the year your weekly shop might cost RM100 but by the end of December the same trolley full of goods will cost you RM104.
Inflation is a sneaky operator which is why many people don’t notice how it is eroding their savings. I was born in 1982 when the first CD player was released by Sony, computers hit the mainstream—Time magazine named The Computer its ‘person’ of the year—and a loaf of bread cost just 37p. Today, with computers ubiquitous and CDs heading towards obsolescence, the same loaf of bread costs GBP1.35—a price increase of 258 per cent over the course of my 32 years! Imagine if my parents had put GBP1,000 under the mattress for me when I was born and not touched it until now. They would still have GBP1,000 but while in 1982 they could have bought 2,703 loaves of bread with the money, today they would get just 741!
Savings deposited in the bank are subject to the same inflationary onslaught. If the rate of interest you are earning doesn’t match that of inflation, while the figures on your bank balance might be increasing, inflation is chip, chip, chipping away at your purchasing power and the money you have worked so hard to earn is effectively falling in value. The figures used in the example are small, but scale them up to the value of an individual’s retirement savings and the impact is magnified to scary proportions.
So how can you fight this silent but deadly thief? The answer is to save smarter. To minimise the effect inflation has on your savings, limit bank deposits to enough to cover an emergency fund that you may need to get your hands on fast and invest the rest of your hard-earned cash elsewhere. You need to look at investment products which offer returns at least equal to, and preferably well over, the rate of inflation. This might take you into a financial domain which is completely alien to you and if that is the case you should look to get qualified advice from a reputable and regulated financial planner.