By Godfrey Kenneth Gobba
Often times, because we don’t really understand how inflation wipes out our purchasing power over the years, we usually don’t consider protecting it from inflationary erosion as a priority.
Purchasing power is how much your money can buy. It is how many kilos of sugar or loaves of bread you can afford to buy at a particular time. You lose your purchasing power when inflation grows faster than your money.
To preserve your purchasing power, your money needs to earn a return that is higher than the prevailing inflation rate. If inflation is at 4% then you need to earn 5% to preserve your purchasing power.
Almost two decades ago a soda cost only UShs500. Today the same soda will cost you a minimum of UShs1000 which is a 100% price increment. Back in the day UShs100 got you four pancakes, but today each pancake costs UShs200 which is a 700% price increment.
If a couple tries and fails to make babies, they will turn the world upside down to find a solution. They will visit every baby doctor and pastor that they can find and afford. Their desire will push them to do everything they can to get a bouncing baby.
But if you told the same couple about inflation and how it will wipe out their purchasing power in the coming years if they don’t take steps to protect their money, they will attentively listen to you and will be so grateful that you took the time to share this with them.
They will get an emotional high for a couple of days but when the hormones sober up, all will be forgotten and life will go back to normal. Fast forward 20 years into the future, they will still be using the same savings accounts, they would have lost a ton of their purchasing power but this loss will still not register in their minds.
Sometimes I wonder what the hell is really wrong with us. Why do we do things with this “to whom it may concern” attitude? Why can’t we pursue financial matters with the same drive we use to pursue sex or marriage or babies or any other desire in our lives?
Assuming that your current annual household expenses are around UShs30 million now, did you know that if inflation averaged 5% p.a. for the next 10 years and your expenses stayed constant, you would need UShs48.9 million to be able to afford the same goods and services that cost you UShs30 million 10 years ago?
Did you know that if inflation continued to grow at 5% p.a. for another 10 years, you would then need UShs79.7 million to be able to afford the same goods and services that cost you UShs30 million 20 years ago?
This is how inflation erodes our purchasing power and consequently, we find that life keeps on getting more expensive for us over the years and we can’t afford the kind of lifestyle we used to enjoy years ago.
Do you really think that the miserable returns you are getting in your presumably safe savings accounts will be able to cope up with inflation?
My appeal to you is that you should start making financial issues like preserving your purchasing power part of your top priorities. After all if you lose your purchasing power to inflation over the years, you might be too broke to enjoy any of your other priorities.
The author is CEO, African Investor Academy
