While growing up, you may have heard the saying ‘money these days have no value’, and this was many years ago. Has it changed? In essence, it’s the same and will continue to be so for generations to come.
Money is a commodity accepted by consent as a medium of economic exchange, in which prices and values are expressed. It passes from person to person during trade and is the principal measure of wealth. What causes this precious commodity to devalue over the years?
Let’s look at some of the triggers that would create the decrease in the value of money. A dollar 50 years ago is still a dollar today, but the buying power (value) of that dollar is now less, meaning you cannot buy the same item today that you could have years ago.
These triggers include but are not limited to monetary policies, rising prices or inflation, demand for currency, economic growth, import/export prices and most recently global shipping cost and the war in Ukraine. Any of these or a combination can cause the value of money to decrease.
These triggers don’t only affect certain industries, but all sectors of our economy. The biggest area of concern is food. While we will support local manufacturing and the agricultural sectors, a large percentage of raw materials are imported, which also adds to the increased cost of finished goods and services.
Our exports should ideally be greater than our imports to have a surplus in foreign exchange. But with the reverse happening, it leaves certain sectors seeking foreign exchange at a higher price, hence adding to the rising cost of goods.
All of this can be referred to as inflation – Inflation is a general increase in the prices of goods and services in an economy. When the price level rises, each unit of currency buys fewer goods and services.
How can we counteract this? How much are these increases? Would my salary carry me home comfortably? Do I need a second job? Where can I cut back on my budget?
I am sure these are questions you ask yourself; you are not the only one. Proper financial planning is key to overcoming some of these triggers. It does not matter how much money you work for; it affects all of us, but some more than others. These are some areas you can explore, to better position yourself and your family in these difficult times, knowing that inflation can be at times higher than any salary increases you may get.
“Pennies do not come from heaven, they have to be earned here on earth” –Margaret Thatcher (October 13, 1925 – April 8, 2013), Former British PM, The Sunday Telegraph,1982
Formulae to consider
While looking to invest your money, you must consider the return of investment (ROI). In reality, this should be higher than the inflation rate. However, given the current economic times, some investments may not yield that ideal return, so spreading your investments over a series of investment vehicles over certain periods, should give you a better return.
More so, if some of these investments allow you to buy in at periodic intervals, this will be considered ‘Dollar cost averaging’, where you may buy in at varying rates, which would eventually give you a better average return.
These are two formulae that you need to consider.
(a) How long does it take for my money to double in value: By using the ‘Rule of 72’, this means that you will have to take 72 and divide it by the current interest rate. For example, 72 divided by 6 per cent interest means your money would double in 12 years. The lower the interest rate, the longer the period.
(b) Another specific formula can be used for calculating the future value of money, so it can be compared to the present value.
Call me for more information on planning your financial future. Send your questions to email@example.com or call 620-1185.