How Inflation affects Your Savings and Investments

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I should do a thread on how inflation affects your savings and investments and how to protect your portfolio. Tonight or tomorrow morning? 🤔

Tonight it is. Coming up at 10pm.

Let’s say you intend to get married next year and you are thinking of buying a gold ring. You have three options:

1. Buy the ring now and keep it because gold is always appreciating, at least in Naira terms

2. Keep the money in your bank account

3. Invest the money immediately

One of the biggest mistake you can make is to keep your money in a bank account doing nothing.

The next mistake is to invest the money in some fixed deposit instrument running at say 7% in Naira terms. But it is far wiser to do this than to keep the cash.

Assuming the price of gold appreciates at the same rate as inflation (15%), and the gold ring costs N100k, you can be sure that the ring will cost you N115k next year.

If you keep cash, you can be sure that you will have to cough up another N15k next year. If you do fixed deposit at 7%, then you need to go and look for another N8k to buy that ring.

Your loss.

This is how inflation damages your money.

First lesson, never keep more than your one month living expenses in your bank account. It is better to buy one year worth of tissue paper than to keep your money in your account.

I didn’t say tissue paper is better than Naira o, but…

Inflation is the rate of rise of goods and services. And the rate we see are yearly growth rates. This rate is currently 15.13%.

This means that on the average, price of the things you see right now are 15.13% higher than what it was last year.

Now, let’s say that you have been very meticulous with your investments. You don’t keep cash. You are always stashing your money away in one kind of investment vehicle or the other.

Are you investing in a good investment or a bad investment?

From the gold ring scenario, you already have an idea of what a bad investment is.

Any investment that will provide a return that is at least as high as inflation is a good investment. It helps you maintain your purchasing power.

Any investment that provides a return that is higher than inflation is a great investment. The higher the return above inflation, the better it is.

Any investment that provides a return lower than inflation is a bad investment. The lower, the worse.

But a lot of times, you can only know with benefit of hindsight whether your investment was good or bad.

Assuming you invest today at 13%, it may look like a bad investment. But what if inflation drops to 12% (unlikely though) next month and keeps dipping down?

All of a sudden your 13% has become a good investment as you are covering for inflation and also adding extra on top.

This is why analysts are always doing all sorts of gymnastics to predict future inflation rates.

But you cannot come and go and die. No one knows tomorrow.

Here is a rule if thumb I recommend.

Try to push for a rate that is at least as high as the last inflation reading. If you cannot meet it then do not do anything more than 1% below current inflation levels.

The good thing is there are many products out there that are providing such returns. I will talk about a few of them later.

But let me warn you. DO NOT DO BANK FIXED DEPOSITS.

Nigerian banks are currently offering fixed deposits somewhere between 7–11%. I say that’s nonsense.

I have a lot of banker friends and I know that they are going to hammer me later, but I will tell the truth.

When these smooth talking bankers come with all their funny products, ask questions and look at them very well. If you see anything less than inflation rates, tell them to shovituptheiresses.

These our banker friends will tell you to bring your father’s right arm and still quote you a rate of 27% to take a loan from them. Just because you want a loan of less than N1 billion.

And they will now tell you to do fixed deposit at 7%. Guess where your money is going.

Now the most annoying thing is they may entice you to do a fixed deposit, which you can use as collateral.

But the minimum rate they will quote for you is 7% above the fixed deposit rate and only for 80% value of your deposit.

So savings accounts, current accounts and fixed deposits are destroyers of value. Only keep your one month living expenses in your bank account. Invest the rest.

So the question you may be asking right now is, “where do I invest money and how much do I need to start?”

You may consider Stanbic IBTC Money Market Fund. It currently has a yield of 14.91%. And all you need to start is just N5,000. Contact @Shareee for more details.

You may also consider ARM Securities Money Market Fund. The minimum investment is N1,000. And their rate is 16.0006%. Sweet! 😍

Disclosure. I do not work for ARM or Stanbic. I am not paid for this. I am simply providing options for Nigerians who may not know how inflation is killing their money.

I have also been made to understand that AXA Mansard also has a money market fund that is currently yielding 15.82%. Minimum investment is N2,000. Nice 👍🏽

You may also consider Treasury Bills, issued by the Federal Government of Nigeria, which are actually the safest investment vehicles in Nigeria.

I have been talking about fixed income investments. These are investments whose tenor and interest rates are fixed.

You know how much you are going to earn from the point of investment.

There are other investment outlets such as commercial papers, equities, real estate, eurobonds, private equities, etc that can help protect your investments from inflation, but these are beyond the scope of today’s talk.

Hope you have a learned a little from this thread. If you have, bless others by retweeting.

Offering basket will be passed around soon.

Information just reaching me is that Meristem also has a money market fund. The weighted average yield as at end of January was 16.4%. Not bad. Contact @mz_asake for more details.

Posted February 15, 2016