How inflation takes your money
How does inflation affect us? Inflation reduces the purchasing power of our money. Let us take the 6.7% inflation of 2005 as an example. A 6.7% inflation in 2005 means that what we could have bought for Tk 100 on January 1, 2005 would require Tk 106.7 on December 31, 2005. For most people, income has not increased at the inflation rate. These people are learning to live with less, as inflation continues to deplete their purchasing ability.
Now let us see what happens to our money when we make deposits to our savings accounts. The Bangladesh Bank lists the interest rate of deposit accounts in 48 scheduled banks. The average interest rate of savings accounts in these 48 banks is approximately 5.9%. Assume that this average interest rate remained fairly stable in 2005.
For all latest news, follow The Daily Star's Google News channel. Then, if we had deposited Tk 100 on January 1, 2005, we would have received Tk 5.9 as interest on our money by the end of the year. However, recall from the previous paragraph that by the end of 2005 we would need Tk 106.7 to buy the same goods that we could buy for Tk 100 in the beginning of 2005.
Thus, the interest that we thought we earned would not even suffice to keep up with the inflation. With Tk 105.9 in December 2005, we are actually poorer than we were with Tk 100 in January 2005!
Saving steadily is not steady enough. Most of us endure hardship to save money. The idea behind depositing money in savings accounts is two folds: (1) to have a safe place for the money and (2) to allow the money to grow through interest (at the very least, keeping par with inflation). But what good is it if the money fails to outgrow inflation? Our money still has a safe place in our savings accounts, but the money fails to grow at all.
We need to find a way to use our money in a manner so that the money not only remains safe, but also increases in value. Various kinds of investments are available, but most are highly risky. Almost all of us know of that relative or friend who has lost a fortune in the stock market.
Considering the rapid increase of gold price, it would have been a great idea to buy gold bars as investment. However, in our culture, gold jewelry has much more value than gold bars or coins. The problem with gold jewelry is that its resale value is significantly diminished, neutralizing any possible gains from the value appreciation of the gold (even after inflation adjustments). Buying gold bars or coins would have been a good idea, but perhaps not a very timely and realistic one any longer.
A third option to utilize our money is by buying apartments and renting them out. This is an old form of business. Here, we observe fixed rents for a period of time, till the landlord all of a sudden decides (almost out of whim) that rent must be increased. Quite clearly, rent is the income generated from owning the apartment. Whether the income translates to a satisfactory yield after inflation adjustment ought to be assessed carefully before jumping into this kind of an investment.
Indeed, the financial picture is rather grim for passive investors. These investors are passive because they want their investments to generate income automatically. People who want to invest their money must realize the problems of passive investment.
In order for our money to generate value rapidly, we must get actively involved in the money-making process.
For those who are more comfortable with savings deposit-type investments, paying close attention to short-window opportunities of high-interest bearing bonds is a good strategy. For those who are interested in the gold market, buying gold and converting them to attractive jewelry may be a way to generate value.
Acquiring gold-plating technology can give rise to ample opportunities to add value to myriad existing products. Finally, for those who are interested in real estate, buying properties and performing renovations can substantially increase the value of the investment.