Death By A Thousand Cuts

There is this bread I love and buy from my local Tesco shop. It usually costs £1. One day on my way home from work I realized I had just the exact amount in my wallet needed to purchase this bread.So I decided to go get it.

I quickly got the bread from the Isle without looking at the price and head straight for the till to pay for it. As I scanned the bread, I was hit with shock when I saw the price of the bread on the screen as £1.20!! The price had increased by 20 pence and I only had £1 on me. I had left my wallet in my car because I thought I wasn’t going to need it. I had to go get it in order to use my bank card to pay for it. After the going through the ordeal, another realization settled in, my money had just lost some of its purchasing power.

We always take notice when the price of good and services increase because it affects whether we can afford what we need and want. And Rightly so. However changing the narrative,  when prices of goods and services rise, the purchasing power of your cash reduces, the same amount of money can no longer buy as much goods or services as it once could. You will need to extra more money to buy the same quantity and quality of goods and services. Your hard earned cash is losing its purchasing power without you having to spend a penny yet.

Now you might be thinking putting your money in a savings account helps but that is not entirely true. Currently the interest on my savings account is 0.35% per year. However according to the bank of england the forecast for inflation coming into 2017 was expected to be 2.7%, that is approximately 8 times more than the interest rate offered by the bank on your savings account. That means your currency will lose its purchasing power faster than your bank can replace it. This has been happening for a while now.

All hope is not lost, there are ways to counter the effects of inflation on your hard earned cash. We had previously posted about how the wealthy deal with inflation titled ” Dealing with inflation like the wealthy”. To have a read click on the:

http://www.peconomics.org/index.php/2016/07/03/dealing-with-inflation-like-the-wealthy/

I am sure there are numerous ways to counter inflation but today I am just going to concentrate on these two;

  • Invest in yourself. I truly believe that before you invest in someone else’s business you should first explore investing in yourself. By investing in yourself, you increase your capacity to earn more. You need to believe that you are capable of reaching greater heights, that you can do what you set your mind to. When you invest in someone else’s company by buying shares you do so because you believe that the productivity and value of the company will increase, yielding great returns in the future. You need to believe the same thing about yourself. So invest in increasing your productivity and earning potential. For example you could;
    • Start or invest in a business.
    • Learn a new skill or gain the  knowledge that will enable you earn more.
  • Store the purchasing power of your cash in the right asset classes at the right time. It is bad enough that inflation eats away your cash, it gets worse when we use that de-powered currency and spend it on liabilities because liabilities lose values rather than gain or maintain it. Assets on the other hand generally maintain or gain value. Its advisable to take some of your cash to purchase an asset in order to store purchasing power since the asset purchased has potential to increase in value not just price. So even though prices of goods and services increase, the value of assets tend to increase as well.

I am not suggesting that saving up is a bad thing. Certainly not, I am proponent of saving. I am merely suggesting that while we save we should do so taking into account the effect of inflation on the purchasing power of our cash and consider what to do about it.

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