Make your savings go further

By Letitia Watson
14 November 2017
PHOTO: Gallo Images/Getty Images

PHOTO: Gallo Images/Getty Images

We’re told a good investment should outperform inflation, but what does this mean? We take a look.

What’s inflation?

Inflation is by how much the cost of goods and services increases over time. It’s why the price of bread, for example, is in general a bit higher every year.

In South Africa the Treasury – the government department that manages the country’s economic policy – aims to keep the inflation rate between 3% and 6%. Moderate, well-controlled inflation is usually a sign that a country’s economy is growing and developing.

In August the consumer price index, known as CPI, stood at 4,8%. This is by how much prices of a basket of goods and services used by households have increased.

How inflation can affect your investments

Inflation can eat into your savings if you don’t have a good rate on your investment products.

Remember that inflation increases the price of goods, so to keep affording those goods your savings should also grow. Luigi Marinus, an investment analyst with PPS Investments, explains it like this: say you save R100 today in an account that doesn’t give you interest on your saving.

If the inflation rate increases at 5,5% a year, your R100 will lose about half its value within 13 years. It means you lose your buying power – you can buy much more today with R100 than you’d be able to in 13 years’ time. Inflation is less of a factor in short-term investments.

Medical inflation – how it affects your investment

Medical inflation increases much faster than CPI, which is a trend worldwide, so you must factor this into your retirement planning. It’s usually calculated as CPI plus 3%. For example, if CPI averaged 4,8% in August, you have to add 3%, which makes it 7,8%.

Ask your financial adviser to show you exactly how their scenarios take this into account so you know they’ve chosen good investments to address this issue.

Investigating for education and training

Education and training inflation also rises faster than inflation on general consumer goods.

So when you’re saving for your child’s tertiary or high school education you should select investments with sufficient growth. Education and training inflation is typically between 2% and 4% above consumer inflation.

Danelle van Heerde of Sanlam gives this example: in 2029 someone who’s in Grade 1 today can expect to pay a minimum of R81 600 a year to study for a BCom degree, which at the moment costs about R30 000 a year at one of our top universities (This is assuming an 8% increase a year.) This excludes expenditure on books, accommodation and food.

Investment period also important

The sooner you start saving for things such as education and retirement the better. This will help to beat the effects of inflation.

Over a longer investment time you also see the positive effect of compound interest: even small amounts invested over a long period can grow into a considerable sum.

Say a 25-year-old and a 35- year-old both invest R500 a month up to the age of 65 in a South African multi-asset fund which gives them an annual return of 10% after deductions.

At age 65, the 25-year-old would have invested R240 000 and the 35-year-old R180 000 – a difference of just R60 000. But the effect of compound interest will allow the 25-year old to retire with almost R3,2 million while the other investor will have just R1,1 million in his retirement nest egg, says Leon Campher of the Association for Saving and Investment in South Africa (Asisa).

Tip: always compare various investment products’ administrative costs and growth rate before choosing one that suits your needs.


Read more on:    inflation  |  savings  |  inflation rate

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