How Will Inflation Affect Your Long-Term Planning?

We’re all been hearing about how bad inflation is and that it’s increasing etc. But what does this actually mean and how does it have a lasting affect on our money planning?

What Is Inflation?

Simply put, inflation is when the cost of goods and living increases. Whilst some see this as a bad thing, slight inflation is good as it is a sign of a growing economy; meaning more employment, higher profits and an increase in production. But, right now, we are seeing a significant rise in inflation. In December of 2021, Singapore saw inflation hit a 9 year high of 4%.

How It Affects Us Now

This increase directly affects us, and you may have even felt a bit of a pinch. Food is a bit more expenses and energy prices seem to have gone through the roof. All of this means that your cold hard-earned cash has less spending power, essentially meaning that you cannot buy as many things with the same amount of money as you used to. What further exacerbates this problem is bank interest rates; most current accounts in Singapore have an annual interest rate of 0.05%, meaning the bank gives you that much extra each year (not a lot at all). If current inflation rate is at 4%, you are losing 3.95% of your money every year by just leaving it in your bank account! This means that whilst you are earning money, not only are things getting more expensive but you’re losing money in your bank account too!

How It Affects Our Future

As you can imagine, this situation has a massive knock-on effect for our futures. If inflation increases, or even plateaus at say about 2%, you are still losing money in your bank account. Food, housing, medicine and energy will continue to go up in price, meaning each year you will either be able to afford less, or have to spend more to keep up. Not only that, your savings will not be as powerful as it once was…so you can see how this is a problem two-fold!

How Can We Stop This?

But fear not! If we prepare now ahead of time, we can manage inflation so that it doesn’t eat away at our savings. There are a few things you can do in preparation: first, include inflation in any planning you do. Want to save up for a holiday in 5 years’ time? Inflate your ticket and hotel prices by at least 2% per annum (3% if you want to be safe). Secondly, consider using vehicles and instruments that will offer you higher returns than your current bank account- any % higher than current inflation rate will give you a positive yield, and will ensure that your savings don’t run dry. I also think it’s best to create multiple avenues for growing your money, so that if one option is not doing well, at least you have money in different areas that you can withdraw from. Lastly, do not underestimate how much different sectors will increase. Food, healthcare, housing etc. do not always follow the same trend or inflation rate. Ensure you have medical expenses covered and calculated into your long-term planning, as well as remembering that your income will not go as far in future unless you ensure there are increases.

Essentially, it is best to start planning now instead of panicking later on in life, realising that you could have prepared for inflation but didn’t. As always, it’s best to stay in-the-know, and consult a professional when it comes to your financial planning.