In this post, I am going to show everyone some facts and trends of the Singapore economy. Then you would know why financial education is important!
Money as a consistently depreciating currency
I am sure many of us would have heard of Inflation, and we know it, either from listening to the older generation ranting about how coffee could be bought in a matter of cents, or from comparing with our food prices a decade ago. Here is inflation in greater detail.
The graph below shows the general trend and the rate of inflation from 1985 up till today:
Singapore uses a weighting to measure inflation as follows:
Clothing and footwear 3%
Recreation,alcohol and tobacco 16%
Notice how much housing, food and transport plays in the weighting of inflation? What does this mean for us? On top of food and transport as a necessity, Inflation impacts our lives in a BIG way because all of us would need to own a house in future and we would take the hardest hit!
Can you see that inflation is indeed an unstoppable trend? An alarming fact to know is that, if you have a dollar today, taking inflation at a fair average of 4% per year would mean that your dollar will have the SAME VALUE as $2.20 after 20 years. In other words, the value of money you are holding at this moment would be more than halved after 20 years! Money never stops losing its value.
The irony between what we know and do.
I think many of us know inflation at our fingertips already, but it is surprising that few understands it. Note that Knowing and Understanding are very different entities. If one understands the impacts of inflation, one would have the skills to MITIGATE its effects on one’s life by TAKING ACTION to maintain one’s purchasing power.
However, many of us do not really know what to do with our money. Most of us spend what we need to spend, and save what we need to save. And you’re right, we put our savings in the bank because its the safest haven. But wait, is it still that safe? I’m telling you its a outright NO.
This graph illustrates the interest rates offered by banks from 1990 to today.
What did you discover? Did you notice that the trendline is consistently falling? More horrendous is the fact that interest rates have fell to near zero for the past 2 years! This rate is most likely gonna stay for 2 more years because US has pledged to keep it that way since it wants to stimulate the devastated economy after the 2009 Global Financial Crisis. Most banks are just paying you a pathetic 0.05-0.1% interest per annum for keeping your money with them. If you do the math, you are ‘earning’ a NEGATIVE rate of return of 4%-0.1% = 3.9% per annum. Isn’t this shocking? Banks would never tell you the truth about the real rate of return you are making for putting money with them, because they are out to make money from the financially illiterate. The financially educated people call it legal daylight robbery! The bank isn’t a safe place to put money after all, as it is taking advantage of your financial ignorance.
Where should my money go?
If you happen to be worried and want to know about what to do with the money you are holding now, I congratulate you. You have taken the first step to understanding what financial knowledge is all about. The key to wealth is investing. Investing in itself is a BIG topic and I am not going to touch this concept for now because the main objective here is to let you first understand that you need to take action to protect your money.
The lack of money is the root of all evil. – Mark Twain
The younger you adopt the mindset of an investor, the less financial worries you have in life. I hope this post had served to give some of you a nudge and I certainly look forward to sharing my new post next week. Do check back here for important information, as I assure you that our team would do our part on imparting the right knowledge to you and fulfill our mission.