In­fla­tion erodes your wealth

Grocott's Mail - - ECONOMIX -

Many in­vestors could be in for a nasty sur­prise when they dis­cover how dam­ag­ing the men­ace of in­fla­tion could be on their sav­ings. They need to plan for the ef­fect in­fla­tion will have on their sav­ings and en­sure that they make use of a suit­ably di­ver­si­fied port­fo­lio of in­vest­ments to en­able their sav­ings to grow in real terms over time.

The of­fi­cial in­fla­tion rate is re­ported by Stats SA. It changes on a monthly ba­sis and is in­flu­enced by a number of fac­tors such as the oil price, ex­change rates and the change in the price of a bas­ket of goods and ser­vices used by a “typ­i­cal” con­sumer.

How­ever, there is not just one in­fla­tion rate that ap­plies to all ar­eas of our lives. Ac­cord­ing to a re­port com­mis­sioned by Old Mu­tual, the av­er­age mo­tor ve­hi­cle in­fla­tion rate in South Africa since 1990 has been 5.8%. For ex­am­ple, a mid-sized fam­ily mo­tor ve­hi­cle that would have cost you R260 000 in 2016, will most likely cost around you R455 000 in 2026 and R1.05m in 2041.

The av­er­age in­crease in pri­vate health care costs since 1990 has been 10.1%. What would have cost a pa­tient re­quir­ing, for ex­am­ple, kid­ney dial­y­sis in 2016 ap­prox­i­mately R180 000, would cost around R470 000 in 2026 and R1.99m in 2041.

The same re­search found that a ham­burger, which used to cost 30 cents at a well­known chain of fam­ily restau­rants in the 1970s, now costs around R75. Or­der­ing a steak back in the 1970s would have set you back about 50 cents.

You will now have to pay around R115 for the same meal. In­stant cof­fee used to cost 25 cents at the lo­cal su­per­mar­ket. For the same item, you will now be charged over R80.

Once you re­tire, if your in­come does not at least grow in line with in­fla­tion, you will ei­ther ex­pe­ri­ence a de­cline in your stan­dard of liv­ing, you will run out of money, or you will be re­liant on the State or oth­ers for fi­nan­cial sup­port.

Many in­vestors, es­pe­cially re­tirees, tend to be in­flu­enced by the con­stant flow of neg­a­tive in­for­ma­tion em­a­nat­ing from var­i­ous sources.

When it comes to in­vest­ing, they seek out the so-called “se­cu­rity” of cash or cash-re­lated in­stru­ments in place of growth as­sets such as equities. This strat­egy would lock in a re­turn which count­less stud­ies have shown hardly keeps pace with in­fla­tion over time.

Al­though ex­po­sure to cashtype in­vest­ments is nor­mally a key com­po­nent of a well­diver­si­fied port­fo­lio, too much ex­po­sure to fixed de­posit in­vest­ments could be likened to go­ing on a three-year long blind date. If op­por­tu­ni­ties or challenges present them- selves in other ar­eas, you or the ex­perts look­ing af­ter your in­vest­ments would not be able to make the nec­es­sary ad­just­ments to pro­tect you or take ad­van­tage of other avail­able op­por­tu­ni­ties.

Re­gard­less of whether you are start­ing out in your ca­reer, are well-es­tab­lished, approaching re­tire­ment, or you have al­ready re­tired, you would be well ad­vised to con­sult with an ex­pe­ri­enced Cer­ti­fied Fi­nan­cial Plan­ner® to de­velop a plan to en­sure that en­sure that your money out­lasts you, by tak­ing the ef­fects of in­fla­tion into con­sid­er­a­tion.

• Rands and Sense is a monthly col­umn, writ­ten by Ross Mar­riner, a CER­TI­FIED FI­NAN­CIAL PLAN­NER® with PSG Wealth. His Fi­nan­cial Plan­ning Of­fice number is 046 622 2891

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