The inflation rate is a measurement of the average cost of items which are closely monitored by the department of Stats. The prices movements of around 400 items are measured to establish the annualised inflation rate. The rate is watched closely by the Reserve Bank which is mandated to keep it in a range of 3% to 6%. One of their mechanisms used is the adjustment of the interest rate to either stimulate or contain the economy.
Where is inflation heading?
Rising oil prices are beginning to erode the value of our money once again. After the surprising fall from last year the price of oil seems to have bottomed out and is rising once again. The problem is compounded by a weaker rand as the price of oil is quoted in US Dollars, a currency which has significantly strengthened in the same period.
-R10.68 in August 2014 to R12.20. The price of oil was $113 per barrel at R10.68 in August 2014. At present it is $62 per barrel at R12.20.
Our inflation rate has nudged upwards already from 3.9% to 4.0% as a result of the rebound of the oil price and is set to rise even further in the face of rising costs of electricity and food.
Why is contained inflation important?
Well, simply put, it affects the value of your money. If something costs R100 today and inflation is 6% then in 12 years the same item will cost R200 which is double. If inflation is 12% then the same item will cost R200 in 6 years which is half the time.
The higher the rate of inflation the less your money is worth in the future.
What can we do about it?
Get rid of your debt
If inflation rises then interest rates will probably go up. This means that your debt will cost you more.
Invest in inflation beating returns
Your returns should be above the inflation rate if your money is to stay real in the future.
Contain your spending
Inflation is driven by consumer spending. Curtailing your spend will keep more money in your pocket which can be used to pay off debt and improve your savings.
At the recent passing of a very wealthy client I spent time reflecting on of what money was all about. He had a very sizeable estate which was left to his two children as he had just lost his wife to a terrible disease shortly before he died. All he had at the end of his life was a lot of money. He hadn’t found the time or real reasons to enjoy the benefits whilst he was alive.
Money is a means to and end
Money on its own is just money. So if you focus on money all your life all you will have at the end of your life is just money. Money should translate in to an objective to be meaningful, otherwise, “What’s the point?” Understandably, money is needed to maintain our lifestyles but as you move through your life cycle is your money providing enjoyable outcomes along the way?
Peace of mind is the ultimate
When you really think about it we all just want peace of mind at the end of the day. We take comfort in the knowledge that we have enough provisions to maintain our lifestyles no matter what happens along the way. It doesn’t mean that we have to provide for an excessive lifestyle either. Contentment can be found in maintaining a very ordinary lifestyle not worrying about your financial future, Still being in a position to take those holidays, send your children to school, buy the car etc.. all without worrying about how you are going to pay for it.
Aim for something realistic
So, it becomes more important to clearly define what your lifestyle objectives are and then start to save towards them. It takes a hard and realistic conversation with yourself to discover what you really want and then why you want them. The higher you aim the more you will have to provide for over time. So, the answers will be found in compromising on the size of the house and car even the type of school for the kids. Things you can comfortably afford within your means which lead to enjoying yourself and sleeping well at night.
Enough versus Excess
Catering for a moderate lifestyle is more realistic and easier to cope with as it is probably far less stressful and demanding than providing for than an elevated one. It boils down to providing ENOUGH to enjoy your life along the way rather than giving up so much more to enjoy EXCESS somewhere in the future.
When deciding upon an investment the main aspects to consider are:
Risk – the possibility of losing capital.
Return – the yield of the investment over time. This could be interest from cash deposits or bonds, rental income from property or dividends from shares.
Liquidity – how freely are the funds accessible
Costs – the charges applied to the investment. Mainly the fund manager, the administrator and the advisor.
Tax – taxes applied to the returns as well as capital gains tax when you sell the investment.
The following comparison includes the common investment options available based on general returns and costs and clearly shows that the home access bond is a great place to save your cash in the short term.
The value is found in saving the interest applied to your monthly bond instalment. The bank rules off at the end of each month and applies interest to the average balance in the month. By having a higher balance through your extra savings the interest applied for the month is lower and so the rest of the instalment pays off more of the capital owing. The effective rate saved is the rate of interest that the bank charges you. In the comparison the current prime lending rate is applied.
Where else can you get 9.25% interest, guaranteed, no costs, no tax and immediately available?