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Monday, 12 December 2016 00:00

Effect of Inflation on Investment

Welcome to the second Blog of my Blog Series - Investing 101 the Basics of Investing. Today we will be looking at Inflation.

The easiest way to look at Inflation is to think of it as purchasing power because it affects our ability to purchase various quantities of goods or services.

The reason that this is important in investments is because if our investment doesn’t keep pace or beat inflation then we are actually losing money instead of gaining. This is because our investment will lose its purchasing power over time.

 

 

Purchasing power is a phrase to describe the quantity of goods or services that R1 can buy. A decrease in purchasing power is called inflation. Let's assume R1 bought a toasted sandwich in 1987. Today, R1 would perhaps get you a slice of tomato for your sandwich. This is an example of the change in the purchasing power of the South African Rand.

 

If the Inflation Rate is 12% per year, the real purchasing power of money is halved every 6 years. An easy way to work out the impact of inflation on the value of an Investment is the rule of 72.

 

Divide 72 by the rate of inflation, this shows how many years it will take for the real purchasing power of your money to halve.

For example, an income of R100 000 in today’s money to be halved at an inflation rate of 6% per annum (72 divided by 6) equals 12 years. Therefore with an inflation rate of 6% per year in 12 years time R100 000 will only buy you what you can buy for R50 000 today.

 

Inflation over time reduces buying power and the value of money. If the value of the investment over the longer period does not outperform inflation the value of the investment is being eroded. Inflation is important and should not be overlooked in any investment strategy.

 

For a more in-depth look at inflation have a look at the YouTube video below.

https://www.youtube.com/watch?v=UMAELCrJxt0

 

I am interested to hear from you, any questions, stories or comments can be added below or leave us a reply on Facebook.

Author Ben Charlton

Edited by N Du Preez (Business Internet Marketing Solutions)

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Ben Charlton

A financial planner can be someone who sees you as a number; they sell you the product that works best for them, they do exactly what you ask for, no more and no less. We are not like that, to us, our job is not to sell you a product, it’s to help you realise your dreams.

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