9 Ways To Tackle Inflation

Though the statistics for November 2017 Consumer Price Index reports inflation at less than 2% (source: Singapore Department of Statistics), inflation is here to stay and it has a direct impact on our purchasing power and hence, our current and future lifestyle.

Singaporeans who are uncomfortable taking financial risks and who are happy parking money in bank deposits, playing ‘safe’, are facing an even bigger risk – that of not protecting themselves against inflation. In the long run, savings will actually shrink and they could become poorer, not richer because of inflation.

How much will $10,000 in today’s value be worth at different inflation rates in 10 years time?

• At 2% inflation, it will be $8,171.
• At 3% inflation, it will be $7,374.
• At 4% inflation, it will be $5,987.

Therefore, it takes discipline and a sound investment strategy to cushion the impact of inflation.

1. Reduce spending and live within your means

Buying things on impulse and on big ticket items beyond your means could cause you to spend beyond your means. It is time to review your spending pattern and your lifestyle. For example, you could substitute a branded item with a no-frills one or switch to a cheaper mode of transport like the MRT.

2. Try to save 20% or more of your pay cheque

Pay yourself first before you start paying your bills. Saving 10% is good but if you can manage 20% or more, you’re giving yourself a bigger head start in building surpluses for long term investments.

3. Do not be overly conservative

Invest your money instead of putting it in fixed deposits or saving deposits. These instruments do not help to overcome the effects of inflation. Another alternative would be to place your money in money market funds that have low sales charge and offer better rates than the deposits.

4. Save regularly via an investment platform

Dollar cost averaging is one of the best ways to complement your lump sum investment. This method reduces risk in the long term and it provides a disciplined way to save. The earlier you start investing a fixed sum regularly, the quicker your investment will grow to a significant amount in your later years.

5. Take on sensible level of risk

You do not need to be an aggressive investor overnight. You can build an investment portfolio that is well diversified in the various asset classes that suit your risk profile.

6. Invest for returns that will beat inflation

Consider investing in a diversified portfolio of stocks and bonds over the long term. A moderate-risk portfolio with 60%-70% equities and 30%-40% bonds could generate a decent annual return over the long term.

7. Understand the power of Compounding

The Rule of 72 will help you to understand how long it takes for your money to double. Simple take 72 and divide by the percentage return. For example, with a return of 9% a year, you will need 8 years for your money to double. If you invest $100,000 in a portfolio that can give you an annual return of 8%, this amount can grow to about $467,000 after 20 years.

8. Invest in asset classes that appreciate

Property investment is not for everyone. But this can be a good investment only if it is within your means. If rental income increases at a faster rate than inflation, your property yield will provide a healthy return.

9. Limit exposure to depreciating assets

A depreciating asset would be cars. If there is no necessity to change your car, then stay with your existing vehicle. I hope you will be able to put into action some of these tips to start building an inflation-proof investment portfolio. If you do not know where to start or unsure where your investments are headed, let’s have a chat!