Inflation is one of the reasons why do you need to invest your money. In economics, we have known inflation as the general increase in prices of commodities. The higher the inflation, the lesser the value of our money. Inflation degrades the value of our money. Your money last year cannot buy the same amount of goods now.

WHAT CAUSES INFLATION TO INCREASE?

Increase in oil prices. Oil is a very important commodity in the world because it is one of the raw materials of every company used to run their machineries and equipments in production. When oil prices shoots up, their costs would shoot up too. Definitely, the only way for them to profit is if they sell their products higher than their costs. This causes the increase in prices of their finished products.

Too much money supply. By Law of Supply and Demand, a high demand with low supply would push the prices up while a low demand with high supply would push the prices down. The same thing goes to inflation.

During my high school years, I used to ask that since Central Bank prints our money, why can’t they just print more and more money and give it to all poor people to alleviate poverty? The answer is it would be dangerous to the economy of that country as it would cause a very high inflation rate or what we call hyperinflation. This was the case why the Zimbabwe currency fell too deep that it has almost no value at all.

Scarcities. Again by law of supply and demand, scarcities in supply of a particular commodity raises its price. When a country experience calamities like typhoons or drought that destroys various farm crops, then the tendency is that the prices of these crops would shoot up too.

HOW TO COMBAT INFLATION?

Add additional income. Take a second job or a part-time job to increase your income. If you can manage a small business while you are employed, then do it. Do something that you enjoy like freelance writing or tutoring academic subjects you’re good at.  

Control spending. Learn to control your spending by cutting on unneccessary expenses prioritizing more on the needs and less on the wants. Try the idea of “downsizing“. Instead of buying a high end mobile phone or a laptop which you can’t really maximize its features and you just buy it just to be “in” trend, buy a low end which you can maximize its features.

Invest in high-yield types of investments. When you have already saved for your emergency fund, try investing the rest of your money into high-yield types of investments. Choose the type of investment which has higher interest rate than the inflation rate. For example, if the inflation rate is 5%, choose a type of investment that has a yield of more than 5%. In that way, your money’s purchasing power won’t be devalued.

Inflation is really a threat to financial freedom as it eats the value of our money. Learn how to fight inflation and increase the value of your money.

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Filed under: Finance Concepts • Investments

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