Saturday, January 26, 2013

How to Cope With Inflation?

Continued from Knowledge about Inflation.

As explained by the previous blog, we can see how the inflation rate affects our lives, by depreciate the value of our money, the cash in our hand. What can we do to overcome this phenomena, or circumstance, or the fact that cannot be denied?

Everyone should know, inflation happens in every corner of the world, none of the country or none of us can escape from this. As long as there is so called “economic”, the word “inflation” is always defined the same way in this context.

However, every problem comes with solution or solutions. It just depends on whether we are going to accept it, and use it. There are several ways that we can implements to overcome the inflation in our lives.

First: Work harder, earn higher salary

This is the most typical way, that most of the people do. When inflation happens, our money get depreciated. Our purchasing power get weakened. The only way to do is to earn more money in order to buy the same amount of thing.

Let’s take 5% inflation rate again, and monthly expenses of RM1500, or annually RM18000. One year later, our annually expenses increase by RM900 and five years later it will be RM18000 + RM4500 (inflated cost) = RM22500. That means, after five years, monthly expenses will be RM1850. The increases of RM350 in monthly expenses means that we need to pay extra RM350 for the same thing in a month.

What can we do? Work harder, then earn higher salary to cover the extra RM350 after five years. Hmm, getting the salary raise of RM350 after five years sounds simple to some, but some feel difficult. What can they do?

Second: Learn financial management/investment

This is the way I am implementing. Financial management means that, we manage our own financial, such that we know how to split the money we earn, and how we use them. Major part of the money we earn normally goes to the necessary expenses like food, rental, clothing, etc. I would like to emphasize on investment. We should spare some money for investment.

Investment is not gambling, there is risk, but there is a way to do it. Many people disregard this topic when they heard about investing, because of conservative minded or environment influence.

Actually, investment can be safe, if we know and we learn it. Just like many people who never drive car, and they feel driving car is danger because of observing too many fatal road accidents happening around. That’s how they keep themselves away from driving car. But, if we know how to drive and control, it will be safe.

Same things apply to investment. Investment is not just talking about “stock market”, buy low and sell high. It’s about getting a passive income. Investment can also be saving in bank as fixed deposit to get annual interests, investing in profitable companies to earn dividend, starting a business and invest our time on it to make it success.

Investment is not about only money, it can be time and energy as well. We invest our time to build up a business, or to explore and gain more knowledge, can be known as investing on oneself. Investing energy can be just simply means like spending our energy to get some return, such as helping people around like doing charity, which help us in social networking. Working out at gym room, to improve our healthiness. That’s also an investment.

Let’s relate back to the inflation again. How does investment help? As mentioned, it’s about passive income. Now we are concern about the money. What do we mean by passive income? Literally, the money that comes passively. It comes itself without any need of us to be active in anything. For example, we save our money in bank, and the bank pay us interests every month or year. The bank interest is our passive income. If we invest in profitable company, the dividend they paid us is another kind of passive income.

Then, how does passive income helps? Let’s say, today we invest a company and it pays us 7% dividend return. With 5% of inflation rate, we actually overcome the inflation and earning 2%. That’s how the passive income works. Since passive income does not require us to pay any energy and time on earning them, we can still carry on with our usual work and earn our active income, which is the salary. Which means, we are having income from both side, passive and active.

More and more investment tools in the world

Investment is not only about buying stocks, it can be anything that brings us passive income. Bank saving, stock investment, business startup, property renting, government bonds, etc.

The more we explore the way of investment, the better our financial management skill can be. We shall start now, invest our time to learn this knowledge, then start investing our money!

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