Money And Interest: The Oil Of The Economy
It is very important to understand the role of money in today’s world. Financial institutions and banks exist solely to facilitate the economy, our day to day lives.
In any growing economy, there is bound to be inflation. This is where the general level of prices of goods and services increases over time. In Singapore, core inflation is at 1.9% (average for the past 10 years according to MAS). Let us now take a look at some common financial products in the market today and 5 key learning lessons on beating inflation.
Common Financial Products
|Financial Product||Yearly Interest (p.a)|
|Loan Sharks||- 30%|
|Credit Cards||- 24%|
|Personal Loans||- 6.0%|
|CPF Student Loans||- 2.5%|
|Car & Home Loans||- 1.5%|
|Deposits Accounts||+ 0.5%|
|Savings Accounts||+ 1.5%|
|Singapore Saving Bonds (SSB)||+ 2.0%|
|Fixed Deposits||+ 2.5%|
|CPF Ordinary Account||+ 2.5%|
|CPF Special Account||+ 4.5%|
|STI ETF||+ 3.0%|
|Active Funds||+ 8.0%|
|DIY||+ 10 to 20%|
|Alternatives (eg Property)||+ 100% (varies alot)|
5 Key Lessons To Take Away
Lesson 1: Always Benchmark To Inflation
- Do not benchmark to 0%, because that is the wrong indicator
- The correct indicator should be in this case 1.9% as that is the yearly interest you would need to beat for your money not to depreciate over time
Lesson 2: Money Is More Valuable Today Than Tomorrow
- Economists call this “Time value of Money”
- Money essentially gives you options to buy and sell goods and services
- Savvier people and institutions deploy their money to get more returns (investing)
Lesson 3: Pay Off Your Debt Before Investing
- If you refer to the chart above, you can get hit with a -% on returns
- As far as possible, learn to spend with what you have and not get into excessive debt (e.g Credit card debt of 24% p.a)
- Also, try not to play with leverage (high risk) unless you are a seasoned investor, where you borrow money to invest
Lesson 4: Compounding Works Both Ways
- Echoing the above lesson, you can experience either of the two:
- Negative exponential growth: If you are in the negative range, over years you will sink deeper into debt
- Positive exponential growth: If you are above 1.9%, over the years your money will grow and snowball into a much larger sum
Lesson 5: Diversify (Less + More Risky)
- If you refer to the chart above, there are a variety of products you can invest in to help you beat inflation
- The ones which are slightly above inflation (eg bonds, CPF) have less risk
- The ones which are way above inflation (eg stocks, DIY, Alternatives) have higher risk but also potentially more returns
Conclusion: Decide How You Want To Beat Inflation
Inflation is seen to be a necessary evil.
From the days of Coca-Cola costing $0.10 till today, it can be quite scary if you do not understand the basic idea of money and interest rates.
Reference this article to understand which side of the fence you would want to be on, and start early on your road to beat inflation!
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