Tackling the hungry monster called inflation
Inflation can sneakily eat away at the money you've saved, which is why it's best to invest it in equity
By Saurin Parikh | Sep 5, 2015
Among the many peculiar habits my wife has, the one I find the rummiest is her tendency to not have an entire bar of chocolate in one go. She likes to eat the chocolate one piece at a time, leaving the rest for later so that she's able to cherish it for a longer period of time. This, I can't comprehend. Me, the one with the sweetest sweet tooth, can't help but devour an entire chocolate-or any other sweet---in one go and as soon as possible. I don't worry about cherishing the sweet for a longer period, because there will be something else to have at a later time, right?
Now, this was one of her habits that I find peculiar. But on a related note, there is one habit of mine that she finds extremely annoying. She doesn't like it when she leaves behind her chocolate to have later, only to find it gone. Why wouldn't I gobble up a chocolate that's lying around in the fridge? What if it's feeling lonely? What if it's feeling ignored and unloved? We'd never know. The purpose of its existence is to be eaten, which is exactly what I do. But don't tell my wife that, she's not buying that theory.
Of course, I can understand why. No one likes it when something they've saved gets consumed by someone else. To cite another example of this-inflation. Inflation is a sneaky, hungry monster. It'll creep into your savings surreptitiously and eat away your money little by little.
And this is why your money shouldn't be lying around idly. The best investment avenues are those that will earn you more than the prevailing rate of inflation. Which, obviously, is equity. Equity could be in the form of direct stock investments or equity-oriented mutual funds. Long-term investments in equity have been proven to generate returns that have beaten inflation over various time periods. Fixed income, on the other hand, hardly ever manages to beat inflation. And money in your bank account is just calling for inflation to come and eat it up.
Since the value of your money remains stagnant if it is not invested, inflation tends to erode this value. What you are able to buy today for R100 will be costlier in coming years because of inflation. Hence, your money needs to outgrow inflation so that you can afford the higher expenses and have something left behind as savings as well.
The worst thing about inflation is that you won't even notice that it is eating into what you've saved till it is probably too late, unlike a chocolate-eating husband. My wife hides her chocolates to make sure I don't end up eating them, and in a similar way, you need to invest your money in a way that doesn't allow inflation to eat it up.