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Mitigate Inflation Impact: Effective Financial Planning with Our Expert Advisors

Mitigate Inflation Impact: Effective Financial Planning with Our Expert Advisors

Last Updated on by Tree of Wealth

Inflation in Singapore, as in many places, touches every aspect of life, from the cost of a cup of coffee to public transport fares and even major expenses like real estate. As per the Singapore Department of Statistics, the consumer price index (CPI) rose by 1.8% in 2021.

This means, the S$20 you had in 2020 has the purchasing power of approximately S$19.64 in 2021. Projecting the trend five years into the future, your S$20 from 2020 will be equivalent to about S$17.82 in 2025. Hence, inflation is often referred to as the silent thief.

Inflation encapsulates the ongoing rise in the prices of goods and services in a particular economy over a time period. It brings about a situation where your money’s worth is diminished as it buys lesser goods and services, indicating a decrease in monetary purchasing power. It’s the central bank’s responsibility, like the Federal Reserve in the U.S., to maintain the money supply balance in the economy to regulate inflation.

Now, let’s delve into the impact of inflation:

  1. As inflation accelerates, the money’s buying capacity shrinks. With the increase in the price of goods and services, the same amount of money will procure fewer items, thus depleting the real value of money. The same goods and services that could be bought before now need a larger amount of money.
  2. Inflation paves the way for economic unpredictability and irregularities. If prices continually rise, it becomes increasingly challenging for individuals to plan their financial futures, thereby creating an uncertain and unstable economic environment.
  3. Inflation can influence wealth distribution. In the event of escalating prices, some individuals may find themselves at a disadvantage, while others could see their financial situation improve. For instance, if the inflation rate outpaces wage growth, it can be detrimental for individuals as their income struggles to match the cost of living. Conversely, individuals with appreciating assets like properties or stocks could find themselves in a beneficial situation.

Now, how can we combat inflation?

  1. Central banks have the power to control inflation through monetary policy. This includes actions like adjusting interest rates or buying securities to regulate the money supply in the economy.
  2. Fiscal policy, involving taxation and government expenditure, is another tool governments can utilize to stabilize prices and control inflation.
  3. Implementing price controls can be useful to establish a cap on the prices for certain goods and services, thereby reducing inflationary pressures.
  4. People and businesses can shield themselves from inflation through financial tools like indexed bonds that correlate with the general price level.
  5. Diversification of investments and maintaining a portfolio with a variety of assets such as stocks, bonds, and real estate can also serve as a protection mechanism against inflation.

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Solutions

Mild inflation is typically an indication of a robust economy, expanding and developing. Nonetheless, it also signifies a gradual depreciation of our currency’s value. How can we adapt and cope with inflation? One could explore various means to grow wealth, including traditional savings accounts, endowment plans, and investments.

  1. Traditional savings account Despite the fact that interest rates on most savings accounts in Singapore struggle to keep pace with inflation, it’s advisable to accumulate an emergency fund equivalent to at least 6-12 months of your living expenses. This fund could cover unforeseen circumstances such as sudden job loss or health issues.
  2. Endowment plans Endowment plans are viewed as a secure and reliable method of saving over time, with a guaranteed return of capital upon policy maturity. Traditional endowment plans have evolved to include cash back endowments, lifetime cash benefit endowments, whole life endowments, and anticipated endowments.
  3. Investments Looking back, 2020 stands as a significant year for investing, with market turbulence due to pandemic-related economic concerns and subsequent recovery supported by government interventions. While investments can potentially offer higher returns, they require a strong sense of discipline and the ability to tolerate years of market volatility.

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The impact of inflation requires careful financial planning and strategic wealth management. While the traditional savings account provides a safe haven, it’s equally important to consider endowment plans and investments as part of a balanced financial portfolio. Being proactive about these measures today can ensure your money retains its purchasing power in the future. Reach out to our financial advisors who are equipped with the expertise and tools to help you create a personalized financial plan that caters to your needs. Take the first step towards secure financial future. Contact us today for a no-obligation discussion.

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