Have you ever wondered “why the poor gets poorer, and the richer gets richer?”
I have been pondering on this question for the last few days after going through some financial planning with some clients.
Many of these clients, whom I have the privilege to do their financial planning, come from low to middle-income earners.
The main characteristics of these people are that:
- They are very careful with their money and every cent counts
- The basic instinct of survival comes to play – Security.
With security in mind, they are very likely to hold onto their money – closest to their hearts – continue saving the money in the bank account.
So what is wrong with this picture here?
This brings us to the gender of my posting today – The Impact Of Current Inflation…
In a nutshell, Inflation is simply a rise/increment in the cost of daily necessities and services over time. An illustration of the impact of Inflation can be shown as: if inflation rate is 5%, your regular Fast Food meal of S$5 can easily cost S$5.25 (S$5 + 5% of S$5) soon.
Do you see what’s happening to the power of your money? For a student to continue enjoying his fast food meal like yesterday, the Parents have to give extra $1 (they are not so miserable as to give only $0.25 more) so as to allow the student to continue his lifestyle.
With this, it also forms a vicious cycle of negative asset allocation, which means that there are a lot of catching up to be done with the current (same) amount of money that you have. The signs of the “Poor” getting poorer are more obvious now…
Inflation -> Prices Increase -> You set aside more money into maintaining current lifestyle -> You have lesser money available to make them work harder for you -> You’re happy with current lifestyle without knowing that you are landing yourself into a “fruitless” future -> This can be brought forward to your dependents -> The cycle carries on…
Want another harsh reality? If you put this S$5 into your savings account for 1 year – with 0.25% interest, you are getting S$5.01; with 1% interest, you are getting S$5.05. So how are you getting the remaining $0.24 or $0.20 for your fast food meal? Did you say “Don’t eat then…”, then I would say, look at the face of your poor child with his watery eyes or fiery temper…
Do I have any solution to combat the current inflation?
Yes, I do. But are you prepared to do it? It’s never too late to get started…
- Follow the tip from this post, and be disciplined enough to set aside 10% of your income every month
- Do this till you have six months of savings set aside as Emergency Funds
- Read this post and gauge for yourself which is the best savings program for you. Note: If you are savvy with Stocks, Unit Trust, Forex, Options, Futures, Real Estate, other options, by all means do go ahead. Just be careful. Do your own studies and not by hearsay. Either go for single lump sum or into monthly savings mode (with the 10% disciplined savings)
- Transfer part of your money in the CPF OA to the CPF SA to earn the 4% returns. Do this regularly.
- Be prepared to do this with a long-term mindset, so as to allow your money to work hard.
You may notice that this solution does not really solve the impacts of the current inflation but… at least you are slowly getting yourself out of the vicious cycle. Your future will bear fruits, not only for yourself but also your next generation.