What is Inflation?
A 1:40min short video that explains the power of inflation.
In essence, things get more expensive over the years due to inflation and for Singapore’s case; Singapore’s inflation rate hovers around 5% every year, and thats to say, a coffee that costs $1 today, would cost $1.05 the next and so on.
See, the most common misconception most people face about money, is that money is real when it really isn’t.
Currency and money is not an absolute, much like what a name is to a person, it really means nothing by its own. And to put it in lay mans, if every thing you have today disappear and you’re thrown into a deep jungle with nothing but a million dollars, chances are, you wouldn’t survive.
See if you have studied the history of Money, you’ll know that notes were first introduced when men still traded with Gold. And Currency like gold, have no value and absolute value by itself. The price of Gold is highly subjective and is based on the demand and supply of the market/value the receiver places on the Gold item. I.e If you live in a world of luxury, a gold nugget would be highly valuable. However, if you are thrown into a country of famine where food and water is scarce, a gold nugget would probably worth less than meat.
To explain what is inflation, we would have to use the same theory and mindset in looking at money and currency today. As we already understand that money is not absolute, we should compare it’s currency not by “I earn SGD$2k” or “I earn SGD$10k” as the currency and money by itself has no value.
We instead compare the currency against a constant, say 1 plate of chicken rice.
Say for example with SGD$2k, one can purchase 1000 plate of chicken rice. But with inflation, you would be able to buy 950 plates the next year and the number of chicken rice you can buy decreases as more years go by (assuming your pay stays the same).
The second misconception most people have about inflation is pay rise.
We slog day in and out for a SGD$2k pay, 5 years later, our boss comes along and tells us he’s gonna increase our pay to $2.2k. We rejoice, we celebrate. But if you work your numbers out, a 10% increment over 5 years would work out to a 2% increment a year, which is still lesser than the 5% inflation rate per year.
What are you trying to say?
What i’m trying to say is that don’t just rejoice because you got a pay increment. If you work your numbers out, you are still able to buy less of the things you did last year, despite an increase in a monetary figure.
So what should i do?
Ensure that your income increases more if not same as the inflation rate every year, just so you know that you are able to buy the same amount of chicken rice as you were able to last year.
Don’t just rely on one source of income to be rich, invest, find multiple ways of earning, be it through business ventures, share dividends, stock prices etc, find passive income to make up for the lack of growth in your active income.