Welcome to another short story on financial topics that can seem daunting. This time, we’re speaking about inflation and its effect on money. What is inflation?Inflation is the decline of purchasing power of a given currency over time. Simply put, it’s a rise in the overall level of prices for the goods & services consumed by households. When a unit of currency depreciates, so does purchasing power, as it takes more currency units to buy the same amount of goods and services than it did in the past.
Historically the majority of African countries have experienced high levels of inflation, and we expect to see inflation rise as a result of COVID 19. However, let’s focus on the Kenyan context.
The price of bread in Kenya in 1992 was 7 shillings. In 2020, the same loaf costs 50 shillings. Over 28 years numerous variables have caused this price increase, but inflation has been the largest contributor. The average inflation rate in 2018/19 was 5%, which means 1,000 shillings in Jan 2018 is 900 shillings in Jan 2020.
Inflation is the worst enemy when it comes to saving, as it reduces the value of money. With an inflation rate of 5%, every year your money loses 5% of its value. Hence 100,000 shillings 10 years ago are now 50,000 shillings. With the rate in Kenya being an average of 6% (2010 – 2021) then your money significantly drops in value every single year. By as much as half!
Therefore saving is not enough: you must invest your money. Simply investing in low-risk investments that have a low but healthy potential return does the trick. Examples of these are bonds, exchange-traded funds (ETFs), and unit trusts. These investments allow you to earn more than 6% per year outpacing inflation. This reduces the overall impact of inflation and with a healthy surplus that is a comfortable profit.
At Ndovu we provide you with access to low-risk assets using trusted providers.
Visit our website for more information on which investments suit your investor profile and your financial goals.
We hope this was helpful and do not hesitate to reach out to us with any queries/clarifications through hi@ndovu.co
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