Why do we NEED to Invest?

Have you tried asking yourself why do I need to invest? Have you ever heard the word “INFLATION“?  I’m pretty sure you’re familiar with that word but do you really understand what it means?

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. 

INVESTOPEDIA

Face Value VS Real Value

In reality, inflation deteriorates the real value of money.  Your Php1,000 bill will have the same face value tomorrow, the next day, or even next year.  But with inflation, the real value of your Php1,000 is not equal to its real value yesterday, tomorrow, and the day after tomorrow. Face value refers to the value printed or depicted on the bill or coin, while real value means the actual purchasing power of money.

Is INFLATION the REASON why do we need to INVEST?

Inflation gradually degenerates your purchasing power.  For example, let’s say you can buy 5 sets of shirts with Php1,000 today. But do you think your Php1,000 can still afford to buy 5 sets of shirts next decade? probably not.

Now you may ask, why there is such thing as Inflation? There are 2 main reasons why inflation occurs:

  • When there is a STRONG DEMAND for goods in an economy.
  • When there is an increase in PRODUCTION COST of goods.

Strong Demand

The first one occurs when the demand is greater than the supply.  In economics, when the demand for a certain product increases, the tendency is for the price to increase as well. This is because more buyers are willing to pay more for that particular product. 

As the economy develops, people are able to generate more money because they are employed and businesses are doing well. As a result, people will have more buying power and thus it increases the demand.

Increase in Production Cost

There are a lot of factors that can affect a product’s production cost. Natural disasters, war, and anything that can drive the supply of raw materials to decline can result in an increase in production cost.

The added costs of production will then be passed onto consumers and will result in an increase in prices.

Inflation is one of the innate problems of a nation and this is one of the main reasons why do we need to invest.  Just like the Law of Gravity, Inflation will exist whether we like it or not.  Since inflation deteriorates the real value of our money, we need to put it on investment instruments that can generate returns that are higher than the inflation rate.

Why SAVINGS ACCOUNT cannot save us from INFLATION

For most Filipinos, opening a savings account in a bank is the most popular way of investing.  Banks have different types of products that are highly liquid and can generate income for a short period of time.

But the question is, does it solve the problem of inflation?

The inflation rate of a booming economy is around 3 – 4%, but for an economy that is under recession, inflation might reach 8 – 10%. Now let’s compare it to the interest rates we earned by putting our money in a savings account.

Savings accounts can earn an average interest of 0.5 – 1% per annum. Savings accounts are actually not a good idea if you want to beat inflation.  I’m not saying that savings accounts are no longer necessary and applicable. As a matter of fact, savings accounts are an ideal place to put your emergency fund because it’s low risk and highly liquid. (we will tackle more of this in the next articles)

Savings accounts are ideal for money intended for short-term needs.  But if we want to grow our money for future needs like education or retirement, we need something that can earn more.  Other investment instruments that are known to earn more are stocks, bonds, pooled funds, real estate, businesses, and many more.

We NEED to INVEST to Beat INFLATION

There are 3 ways to fight inflation according to Mr. Aya Laraya of Pesos and Sense.

  • Control and Minimize your Expenses
  • Increase your Personal Earnings like Salary
  • Increase your Investment Earnings

Controlling and minimizing our expenses is easy but limited. There is a floor when it comes to tightening our budget. For instance, cutting your grocery spending is limited. Especially if most of your grocery items are necessities like toiletries, food, vitamins, etc.

An increase in your basic salary can dramatically change your ability to beat inflation, but this one is limited as well. Aside from the fact that you have no control when it comes to how much increase you can get, getting a salary increase doesn’t depend on you but in your employer.

Unlike the first two options, Increasing your Investment Earnings are not limited, and you have control over it. Although it’s not easy, it’s not impossible. History shows that this option is, more often than not, the most effective way to beat inflation compared to the other two.

We NEED to INVEST NOW!

Not to invest In this day and age, when Investment and Personal Finance awareness are all over the internet, could almost be considered a sin. There are tons of FREE materials available for us to learn how to invest.

Sometimes, the only way to benefit from this is to take action. Start investing in different instruments or put up your own business.