What Is Inflation And How Does It Affect Your Finances?

During the late 1990’s the price of houses, cars and other essential items were way cheaper than they are today. During that time, foods stuffs could easily be bought in cents and the value and purchasing power of money was great. But when the prices of item (vehicles, housing, pharmaceuticals etc.) increases in price it is regarded as inflation.

In this article, we will discuss about inflation and how it affects your finances (saving) as well as the purchasing power in a given country.

What is Inflation?

According to the definition from Investopedia, “Inflation is a quantitative measurement 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. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.”

In a lame man’s understanding

Inflation is the increase in the prices of goods and services over time.

Inflation is an economics term that means you have to spend more in your day to day activities.

Inflation increases your cost of living.

Inflation reduces the purchasing power of each country’s currency; you can’t compare the Nigerian Naira (NGN) of 1990 to the Nigerian Naira (NGN) of 2015.

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As prices rise, your money buys less. That’s how it reduces your standard of living over time.

We have seen what inflation is, now let’s go into more details on how inflation can affect your finances.

How Can Inflation Affect Your Finances?

Before we discussed this, let’s first understand one of the causes of inflation which is “excessive increase of money circulation”. When there is too much circulation of money in an economy it means that there will be too more money chasing a few selected goods and this generally increases the price of that goods or services which in turn will become a chain-reaction affecting other goods both consumable and non-consumable.

When this happens its spread like a wide fire affecting everyone and everything and you aren’t excluded from it and slowly the money you have stock up in your savings account become worthless  – as you will be forced to withdraw more money to pay for goods or service.

A good example to this, is in 2014 when the Nigerian Naira (NGN) fell into inflation. When the Naira was devalued, this reduced the purchasing power of the naira thus too many naira where chasing few goods and services. On the manufacturer’s side, they had to increase their cost of production to compensate for those losses due to the devaluation of the currency.

So when there is inflation, it makes the populace to spend more when without them even knowing, another example is, in 2000, a loaf of bread in my Local Government Area was NGN100 and currently now In 2018 its NGN280.

How Can Inflation Be Managed Or Controlled?

Most developed nations, set there inflation target at 2% year-on-year and this is achievable by various financial policies set by the Central Bank, to reduce the rate commercial banks and other financial institution dispenses cash and circulate money.

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Another way is too mop off excess money in circulation is by issuing debt instruments such as Bonds and Treasury Bills.

How to protect your finances from inflation

There are various ways to protect your finances from inflation such as having your salary increased by a certain percent annually but this can be somewhat difficult and almost impossible to achieved especially if you work in the private sector.

But another better way is to invest in the financial Market such as buying Stocks or Commodity and leaving it to run for a certain period of time. That has its own Financial Risk especially if you are not “not well grounded in how the financial market operate” you need to seek a professional help if you decide to undergo this method.

The third way is to buy financial securities issued by the governments, securities such as Bonds or Treasury Bills as this has a fixed income rate and its risk is limited.

You can as well go into real estate and property ownership, as this is advisable to have a good investment for retirement.

 

In conclusion, inflation can be good as well as bad, depending on the angle you see it. As inflation makes the price of consumable and non-consumable goods and services expensive, it also increase the price of tangible assets such as property. So for those who have landed property, there is a chance to secure themselves from inflation by selling it at a higher price.

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