Imagine you have the equivalent of $10,000 in a safe investment with guaranteed interest of 10 percent at the end of the year. You will be making the equivalent of $1,000 in 12 months. That’s easy money made. You are happy to have your money working for you. However, because you live in a country where the actual inflation rate in the country is 12.8%, you have actually lost a good part of your money.
The reason for this is because the system is designed to make money work as hard as possible towards the growth of the economy. Every year more money is created in the system that makes the value of existing money lose its value. To help you understand this better, let me use an example of a company’s share to explain this.
Imagine you are a shareholder of a company – let’s call the name of the company Shillings. Shillings have 1,000 shares, valued at $1,000 and you own 100 shares of the company. So each share is valued at $1. That makes you the owner of 10% of Shillings – equivalent to $100. However, Shillings has a policy of creating 12.8% new shares every year as compensation to loyal employees, and to raise funds from new investors. So in year one, the company creates 128 new shares. This increases the total share of the company to 1,128.
If the value of the company remains at $1,000, that means each share is now worth $0.88 instead of $1. So your 100 shares are now worth $88.6 – that means you have lost $11.4. If, however, the value of the company grew by 10% – to $1,100, then your 100 shares would be worth $97.5 0r $0.97 per share – that means you lost $2.5.
So the only way your shares will be profitable is if the value of the company – and by effect value of the shares – grow faster than new shares are created – in this case, the value of the shares needs to grow above 12.8% per annum. Anything less than that means you are losing money.
Now, think of a unit of your currency as one share of a company; your money as your total number of shares, the rate at which new shares are created as inflation rate and the rate at which the value of the company grows as the interest or profit you gain from your money. At the current inflation rate of 12.8% in Nigeria, any investment or savings that generate less than 12.8% profit or interest is a loss. 5% is a loss; 12.5% is a loss. It’s even worse when your money does not generate any interest. The idler your money is, the more it loses value. By gaining 10% on your saving, you are actually losing 2.8% of your money. Unfortunately, 99% of people do not understand this about money.
Each country has different inflation rates. You have to know the average inflation rate in your country. It doesn’t matter what the rate is – 3%, 7%, 18%. The lesson is to ensure your money is growing faster than the inflation rate. If the inflation rate in your country is 7% and you are gaining 5% on your investment, you are losing money.
Why Savers are losers
Recently, the central bank in my country reduced interest rates on savings account from 3% to 1.25%. Whereas, the Monetary Policy Rate – which is the interest rate at which the central bank lends money to banks – is at 12.5%. With an inflation rate of 12.8%, you are literally paying banks to keep your money for you. If you do the math, in this situation savers are losing 11.55% of their money each year. Doesn’t that make you feel uncomfortable? Think about it, you labor through the year to make money; you make all the sacrifices to save part of your income; only to lose 11.55% of the value of your money. If you are a saver, I’m sorry to announce this to you; you are a loser by default.
Have you ever asked someone you consider a rich businessman for a lump sum of money as a loan and he tells you he doesn’t have that kind of money? Sometimes they may say that because they don’t want to risk their money with you, but in many cases, they may not actually have that kind of money to spare at that time. You see, rich people understand this concept of inflation. They don’t keep a large chunk of idle money in a saving account, except for emergencies.
This is why rich people are very accustomed to borrowing. Since their money is often tied down in some investment portfolio, they often have to take loans to finance business and investment opportunities.
On the other hand, average people love the notion of seeing how much they have in their savings account. It gives them a sense of pride to see their savings grow. But what they don’t know is that they are on the losing side of the money game. This is why savers are losers.
So what can you do to overcome this inevitable consequence of inflation? Here are some things you can do.
Start with the minimum
If you have formed the habit of saving money in the bank, that means you have been a victim of inflation all this while. First, start with minimizing the effect of inflation on your money by putting your money where you can gain interest that is close to or a bit more than inflation rate.
Mutual Funds, Bonds and Treasury Bills are good examples of such investments. The interest rate for a mutual fund, for example, fluctuates and varies across countries. Interest on my Mutual Fund has fluctuated between 4.7% and 16%. Even at the lowest rate, it is still better than saving in the bank. Most mutual funds allow you to withdraw your money within 24 hours. So in case of an emergency, you can easily access your fund. The goal here is to grow your money close to or a little above inflation.
Expand your risk appetite
Investing your money in an instrument like Mutual Fund and Bonds is better than a savings account. But you are balancing out the value of your money or at best growing a little above inflation. Your next step is to expand your risk appetite by studying other investment options. Investment opportunities that can grow your money above the inflation rate are usually riskier. But that is where your journey to growing your money really begins to pay off.
For example, I invest in agric crowdfunding that pays between 20 and 30% interest per annum. It’s a risky investment, with insurance on your capital; in other words, if things don’t go as plan, you get your capital back but you wouldn’t earn any interest.
You have to deliberately lookout for, study, and take calculated risks to discover high-interest investments. But be careful with getting rich quick programs. Those schemes have a reputation for rendering people bankrupt. Follow the golden rule; if you can’t explain in clear business terms how the investment makes money and it looks too good to be true, then it’s too good to be true.
High-interest investment doesn’t always mean a bad deal if you can analyze the opportunity and see the possibility of such high growth. I have a private loan invested in a business that has been running for some years now at a 40% interest rate. It has been a successful investment. The key is to educate yourself along the field you are investing in.
Diversify Your Portfolio
The Intelligent Investor by Benjamin Graham is a book Warren Buffet described as “By far the best book on investing ever written”. I recommend you read the book as part of your education on investing.
The author explained that intelligent investing is broken down into three principles.
First, intelligent investors analyze the long term development and business principles of the companies they are considering investing in before taking action
Second, intelligent investors protect themselves against serious losses by diversifying their investments.
Third, intelligent investors understand that they won’t pull in extraordinary profits, but safe and steady revenues.
Speaking on the second principle, no matter how tempting an opportunity may be, never put your entire fund into one investment on the promise of high returns. It’s better to gain a little than to lose everything.
The simple knowledge I want you to take away from this video is that saved money can never grow faster than inflation. The idler your money is, the more it loses value. Get a financial education and stop being the victim in the game of money.
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