How to inflation proof your savings?

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Education

Many Singaporeans may not be aware of how inflation erases the value of their money sitting in a savings account. In fact, the term "saving" money becomes a paradox when you do just that - you are in fact wasting money!

Brandan Chen

Financial Planner

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With average inflation in Singapore at just above 2% from 2008 until now (1), you may not feel the pinch of inflation slowly eating into your savings. But with the average interest of a bank's savings account at just 0.1% to 0.8% (2), you are indeed losing purchasing power over time.

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What exactly is inflation?

To put it into simple terms, inflation represents the decline in real purchasing power. The S$1 that you used to buy a cup of Kopi in year 2000 can't buy you that same cup now. Instead, you may need to pay S$1.50 to S$2 for it today. The amount may seem small, but think about the same effect applied to more expensive items - your HDB flat, or what about a medical bill?

Inflation is also frequently presented as a percentage change over a year, which means that you may not see the cumulative effect over a period of time. This is why the Consumer Price Index gives a more representative indication.

pen and a calculator

Source: SingStat

pen and a calculator

Source: SingStat

Sometimes, you may see the term Consumer Price Index (CPI) and inflation used interchangeably. The difference is that the CPI is calculated using the prices of a representative basket of goods that consumers pay for. This may include common foodstuff, transport, healthcare, clothing and other essential items. These items are then included in the index using a weight system to represent the various percentages they stand in a typical household.

The problem is that most people assume inflation to be a number applicable over different categories, but the truth is that the price increase can vary depending on the type of goods, as seen in Chart 1.

Using the medical and dental treatment fee as an example, we can see that prices have actually increased by 21.7% since 2007. Do you now see why your money loses value if you put it in a normal bank savings account?

To do nothing and continue leaving your money in a savings account is nothing short of dangerous in your overall financial planning. Thankfully, there are many ways in which you can solve protect yourself against inflation.

3 possible ways to save your potential higher returns

1. Work your savings harder

You can consider alternative savings plans which provide higher returns relative to a normal bank savings account.

One such example is a fixed deposit account. A fixed deposit account is good for those who have a larger sum of money and are able to forego the liquidity of their cash for specific periods of time. Each account has a different annual interest rate that can range between 0.10% to 1.15% (3)

Higher-interest savings accounts are now provided by a number of local banks such as DBS (4), OCBC (5) and UOB (6). The downside is that it requires you to fulfill several banking conditions - monthly credit of your salary, minimum monthly spending on credit card and a minimum number of transactions on your bank account. While some give out up to 3% annual interest, the hassle of having to track that you fulfill all requirements on a monthly basis can prove too much for some people.

However, both fixed deposit accounts and higher-interest saving accounts are covered under the SDIC’s Deposit Insurance coverage for up to $50,000 per account (7, 8), this is a convenient method to grow your savings if you are risk-averse.

2. Insurance Endowment plan

Most insurers offer some form of endowment plan tied to an insurance policy - enjoy protection while getting potential returns till the policy matures.

Take for instance, the Manulife ReadyPayout Plus, an insurance savings plan that offers you the choice of receiving cash payouts annually or leaving them with the insurer to achieve potentially higher returns.

3. Investing in Stocks

Some people with greater risk appetite may consider investing in stocks. The main problem is that stocks are vulnerable to market volatility, hence you are also exposed to the risk of not getting any returns, or worse, losing part or all of your capital. On the other hand, investing may give you the opportunity for potential returns.

Inflation is a fact of life - to do nothing is to look at your purchasing power being taken away from you over the years. Safeguard your future today and consider some of the alternative ways to help you reach your financial goal.

The information in this article does not necessarily reflect the views of Manulife (Singapore) Pte. Ltd. These are general information and does not constitute or form any recommendation of insurance plan.

Disclaimer:

This advertisement has not been reviewed by the Monetary Authority of Singapore. The information in this article does not necessarily reflect the views of Manulife (Singapore) Pte. Ltd. All stated information, including external links, are general information and does not constitute or form any recommendation of insurance plan. Certain information in this article may be taken from external sources, which we consider reliable. We do not represent that this information is accurate or complete and should not be relied upon as such.

This article is for your information only and does not consider your specific investment objectives, financial situation or needs. We recommend that you seek advice from a Manulife Financial Consultant before making a commitment to purchase a policy.