Inflation.....A threat?

When I was a lot younger, my dad used to give me RM2 per day for my daily expenses at school. That's the money that I used to buy the Hotplate Mee, sirap ais and some other stuff. If I can recall correctly, when my little sister went to school in the 2000's, it was RM5 per day. It is possible that some kid will need RM10 per day in 3-4 years time. Plus...I can still remember that you can get a cigarette at 30 sen per stick in the late 90s. Nowadays, it's RM1 per stick. Heck...I know of a makcik who now sells her kuih tart nenas for RM1.50 per piece!! Imagine if you order 20 piece of tart nenas from this makcik....it'll cost you RM30!!!

To me folks, these are what I call inflation.To be a little bit more technical, it can be further defined as a rise in the general prices of foods and services in an economy over a period of time. As inflation increases, every ringgit that we own buys a smaller percentage of a product or services. In a layman's term.....our purchasing power decreases.....

The most well know measures of inflation would be CPI (Consumer Price Index), which measures the percentage change in the cost of purchasing goods and services by consumers over a period of time

Our very own inflation rate at 31st July 2011 is 3.11% as reported from tradingeconomics.com. However, it is good to note that we have to calculate our very own personal inflation rate to have a better and clearer picture as to how inflation affects us individually...

Based on what I understand, there are 2 reasons for  inflation which is high demand, low supply and the rise in the production costs. Basic economic tells us that when there is a demand for a products or services but shortage of supply, the price will go up. If I can recall correctly, this is what we call demand-pull inflation. When the price of raw materials go up, production cost will increase which in turn will increase the price so that companies maintain their profit margin. Furthermore, their workers will demand higher salaries as the company will pass these costs to the consumers.

So when inflation increases, logic tells us that our purchasing power decreases. A RM1 may buy you a teh tarik 3-4 years ago but now, that's no longer the case. In fact, we may find that in general, the price of most products and services are rising by the hour. Just 2-3 days ago, it was announced that the telco's company will be charging 6% tax on the consumers. In fact, it's even worse when the interest rates going up as loans will cost more which in turn, we have to pay more.....

Hence.....how do we beat inflation (if possible)...

The ways to beat inflation that I can think of now would be:

1) Start investing in the correct investment

As we can see from the graph above, our current inflation rate is at 3.11%. So, for ease of reference, we have to be smart and ensure we invest in places that can give us better returns than 3.11%. What's the rate of return for FD nowadays? Is it 3%? So, a good place to start would be ASB, ASD and Unit Trust

2) Diversify

Almost everybody knows this rule of investing. Never, EVER, put all your eggs in one basket. In other words, you need to diversify your investments portfolio. You may have 40% property investments, 40% unit trust investments, and 20% other investments. You may also split your unit trust investments into equities or bonds or whatever....

3) Invest extra cash in hand to ASB or balance fund. Better still, invest in gold.

4) Debt management. It's time to reduce debt to a minimum level as interest rates usually increases in tandem with inflation. Perhaps, it's time to settle off those highest rate loans as quickly as possible....

So there you go, my brief thoughts on inflation. Obviously, there's more to it that I have just wrote but the bottom line is whether we like it or not, we just can't ignore the importance of saving money. Hence, do what you gotta do and have a nice day....