Inflation. You hear it on the news. You hear smart people talk about it. You hear the word spoken, followed by a barrage of esoteric language, but in order to protect yourself from the confusion you’re feeling, you ignore it all and go about your merry life. Okay, maybe you didn’t. But I did.
If you’ve heard about how frogs won’t jump out of a pot of water on fire even as the temperature rises, that’s how inflation works.
Every year, small small, imperceptibly — in theory — the prices of items go up. A mudu of garri today is N100. Come back in six months, and they tell you it’s now N105. That five naira increase in the price is 5% inflation. That is to say, your ability to buy one mudu of garri reduced by 5% in just six months. Another way to put it: the N100 in your pocket is now worth N95 after six months. You didn’t waste it. You were being a smart person. You “saved” it by keeping it in your pocket. And yet, you lost N5.
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It’s not a big deal when we are just talking about N100. But now, imagine that you’ve been good and you’ve saved up a whopping N1 Million. Like the smart person that you are, all that cash is sitting in your bank account and making you feel all sorts of good. But then I come along and tell you that inflation in Nigeria is sometimes as high as 13% per year. This means that simply by “saving” your one million naira in the bank for the whole year, you will lose N130,000. Sure, the number in the bank will look the same, but as prices slowly creep up throughout the year, the power of that cash is falling in concert, leaving you with the equivalent buying power of just N870,000. That’s right. Just by sitting in the bank, your hard-earned money has reduced in its power to buy the things you need for life. Now you know what inflation is, and why it is so important in the world’s economy — of which you are a part.
So, how do you counteract the impact of inflation on your finances?
Understand inflation. Wherever possible, find out the prevailing inflation rate and adjust your money in the bank. It’s a good wake-up-call.
Buy appreciating assets whenever possible. If you’ve got hundreds of thousands of naira just sitting in the bank, it might be time to go invest in real estate opportunities.
Invest in the money markets. Things like treasury bills and other securities offer a zero-risk way to earn some return on your money. Even if their returns are low, they typically outperform inflation and can guarantee at least a 1% return each year — when corrected for inflation.
Finally, when you’ve amassed quite a bit — say 500K or more, and you won’t need it for 6 months or more, consider converting it to stable world currencies that rarely fluctuate and whose economies rarely experience inflation. This means, yes, converting to USD, GBP, EUR, YEN or YUAN. Welcome to the global economy, my friend.
Next week, we conclude with the final part of the series “The 4 Pillars of Personal Finance Mastery” with the topic, how to access, use and repay credit. See you then.
ABOUT THE COLUMN
Every Monday, JR discusses topics focused on career and money management, seeking to highlight the lessons being learned by young professionals navigating similar paths. If you would like to submit a topic or question, please send a DM to his social media handles – jrkanu on Instagram or email [email protected]
ABOUT THE AUTHOR
JR Kanu is the creator of the app, REACH: Expense & Money Manager – www.reach.africa. This app has helped thousands of young people across Africa to better understand and manage their money. He is also the author of the book, Money Brain: Career & Money Management in Your 20s and 30s – moneybrain.reach.africa. He is a builder of African businesses, lover of African art, an avid reader, writer, and huge advocate of the cities of Jos and Lagos.
