Taking Advantage of Low Inflation Rates

Taking Advantage of Low Inflation Rates. In a previous article, we looked at what the inflation rate is, why it's not so bad and why a low inflation rate is considered as "good news". However, most of us won't feel it directly. So in this article, we'll explore some ways we might benefit from it.
In a previous article, we looked at what the inflation rate is, why it's not so bad and why a low inflation rate is considered as "good news". However, most of us won't feel it directly. So in this article, we'll explore some ways we might benefit from it.





Time deposits become more effective investments

Time Deposits are the safest investment we can make. And the only real downside is that it doesn't give enough of a return to fight inflation. Unless the inflation rate becomes low enough.

With some banks offering 3% interest on time deposits (some might offer more) and an  inflation rate of around 3.3%, it's just low enough that we practically aren't losing our money's purchasing power when we put it in the bank.

If we just want to preserve our money, we can afford to keep it safe in a bank instead of risking it in other investments just to fight inflation.

Note: If the Bangko Sentral cuts rates (as they tend to do during low-inflation periods), banks also tend to lower the interest rates they give on savings and time deposits. However, some rural or thrift banks might still be able to give high enough rates to fight inflation.

Increased Saving

Let's say we earn 10,000 pesos a month. And because we are frugal in our spending we can afford to save 500 pesos every month.

Typically employees get yearly cost of living increases. But this can be very small. For this example, let's say the increase is just 4%. So we get an extra 400 pesos every month this year.

But because of inflation, this isn't really extra money we can put in our savings. The prices of the things we buy have gone up too. If inflation were high (5% or more), pretty soon, we would not be able to save anything and be forced to look for a better-paying job. We might even have to go abroad, leaving our family behind.

But if inflation were low (3.3%) what happens? Our monthly budget now grows to 9,785 pesos. A 3.3% increase on the original 9,500 we spend on necessities every month. But our 500 peso savings is now 615 pesos - an increase of 23%! Because inflation was low enough, the small 4% increase was enough to cover the increase to our monthly budget and then some. The extra money was then rolled over to our savings. We just have to be careful not to let lifestyle creep happen.


Returns of high-risk investment is higher

When we want to grow our money, we have to resort to high-risk investment vehicles. Suppose we invested in an equity-based mutual fund, and suppose the fund did well and gained 15%. We have to remember that the fund manager needs to be paid, and that could be as much as 2%. So we're now down to 13% returns. Which is still good.

With high inflation (5% or more) that becomes just an 8% return in terms of what we can buy with it. Still good, but not great.

With low inflation (3.3%) the returns is at 9.7%. It still might not be great, but it is much better because:
  • We get 1.7% percent more for the risk we took with no additional effort or risk.
  • We are able to re-invest a larger amount.
  • If inflation remains low, we are better able to take advantage of compounding interest because of higher returns, and smaller loss of purchasing power.


More affordable loans

When inflation rate is low, Bangko Sentral usually keeps lending and borrowing rates low as well. Which means banks also ask lower interest from us when loaning us money.

Loaning money (from whomever) should be done only if it is really needed and/or can make us more money than the interest we will pay. But with lower interest rates, the loan terms are more favorable to us. And if we use it to put up a business, it can make the return on investment shorter, letting us enjoy the profit sooner.


Sustained low inflation rate is good for economic growth

It's sounds a bit indirect, but the idea is that economic growth is a good environment for businesses. This means that it could be a good time to put up a business.

Putting up a business shouldn't be dependent on availability of good loan terms or a good business climate. But the idea here is that such a climate might make it easier to put up our own business. We should just make sure the reason behind the business is sound and remember to do our due diligence.

Hopefully this article has helped you see more opportunities during this low-inflation period. If you liked this article, please subscribe to my feed, like me on Facebook, circle me on Google+, or follow me Twitter @thePFApprentice. It's free, you won't miss new articles, and you'll also get my free ebook: the Super Savings Guide.

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photo credit: {Guerrilla Futures | Jason Tester} via photopin cc

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