Inflation, a term that is often overlooked by people in modern days unless they possesses financial knowledge. Inflation is a pest in your treasure chest, a rat in your piles of cash. It is eating up your worth. You could be wondering, hey my cash is still there, and my bank account gives interest. My money in the account is growing more and more, how could there be a rat?
So, what is inflation?
Inflation is a reduce of purchasing power of a currency. An inflation rate of 3% would mean that whatever cost $1 last year would need $1.03 to buy. The value of the money fall as more money is required to buy the same thing compared to last year.
Imagine just by a 3% inflation rate, the stack of $10,000 cash you keep under your mattress today, would only worth $ 8,626 in 5 years time compared to today's value. Imagine after 5 years you bring the same stack of cash to the grocery, you can only fill your shopping cart with what you can buy with $8,626 today.
How reliable official data is?
The real problem is, the inflation data is often published by federal bank or finance ministry after taking a the mean price movement of important living needs items such as food, cost of education, cost of transportation, housing prices etc. Of course they have professional team of mathematicians and economist to help them in reducing the chances of error, but still the number can hardly represent the inflation if a specific area in a country. Take a simple example, the price changes of property in Kuala Lumpur City Center and Cheras can be different in that same year. The price of flour may increase by 2%, but the price of noodles in hawker centers increases differently; some even increase a hefty 10% for a mere 2-3% increase in flour price or petrol price, as if their noodles are made of petrol. Therefore. the reliability and practicality of this data is really questionable when comes into real life application.
According to Bank Negara Malaysia, our inflation for past one year as at January 2016 was 3.5%, while everyone knows that the country has just implemented a 6% GST to most of the consumer items and services. Despite there is a drop in global petrol price by near 50% (USD 75 bbl to USD 30 bbl), the price of petrol in the country did not drop as much. In practical, the composition of every family's expenditure can be very different. Tom's family may spend 50% on property and 20% on food, while Peter's family will spend only 30% on property and 40% on eating out. Therefore, the inflation figure is just a comforting figure, where in actual life, the damage can be far bigger.
The FD interest rate in Malaysia is around 3.5% to 4% last year. In this scenario, it is not even enough to cover the rise of living cost from GST implementation. Is it really a wise choice to save all our money in the bank? Of course not! We need to have a balanced portfolio,
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