The average person lives a normal day to day life, until 4 or 5 years later, the dreadful question that crosses everyone’s mind comes knocking on his door.
"Why did the prices rise in this way? A couple of years ago, the dinar had its value. But now, it can barely buy us anything.”
The explanation for this phenomenon varies amongst people. While some blame the greed of merchants and institutions, others blame the government, and some others blame the people themselves for being okay with such prices. However, anyone with basic knowledge in economics knows that the reason behind the gradual change in prices is in fact inflation.
So what exactly is inflation? And why should everyone understand its impact and how to deal with it?
Simply put, inflation is the increase in the supply of money in exchange for goods and services in the economy.
Suppose we have a simple market consisting of two people, Ahmad and Amal, where Ahmad has a dinar and Amal grows 10 apples per day. Ahmad will buy the 10 apples at a value of 1 dinar every day from Amal for his family.
Now, let's assume that there are two dinars in our small market. Ahmad went to Amal and told her that he wants to buy 20 apples because he now has 2 dinars instead of 1. Though Amal does not have the ability to meet this increase in demand as her production capacity is limited to only 10 apples per day, taking two dinars instead of one will allow her to buy a machine that will enable her to produce 15 apples in the future. As such, Amal decides that she will raise the price of the apples and sell the 10 apples for the value of two dinars.
Though this example is very simplified, and our modern day economy is much more complex, the concept is still applicable to real life. In layman’s terms, inflation is when more money purchases less goods. In other words, it is the loss of money to purchasing power.
Therefore, inflation has a significant impact on everyone who contributes to society and the economy as it affects their purchasing power.
If we assume that you saved 1,000 dinars last year, while the inflation rate in your country was 5%, this means that the value of your “real” savings has become 950 dinars (you lost 5% of its value). Same thing applies with job salaries, if the annual increase in your salary is 5%, while the inflation rate is 5%, this means that there is no real increase in your salary because your purchasing power has not increased.
If we really think about it, prices do not “increase,” but rather the value of money or the currency you use is what “decreases.” Of course, the reasons behind this phenomenon are long and complex, and we shall leave it for another day. But for now, you’re most likely wondering, “ok, what is the solution then?”
The best solution that exists today is to invest money instead of saving it. Your investment in such a case does not need to be complicated or done with a large capital. Today’s tools, though many, are simple; accordingly allowing most people to invest in various assets, whether stocks, real estate, bonds, digital assets, amongst others.
According to the S&P 500 Index, if we look at the performance of the US stock market in the past 40 years, the annual return was equal to 10%.
You don't have to be a financial expert to invest in the stock market as there are many ready-made products that enable you to invest in the market as a whole, such as ETFs in the US stock market, and others.
Investment today is supposed to be a cornerstone in the life of any person who’s looking to preserve and develop the value of their money. Otherwise one ought to be exposed to losing part of his money to inflation.
Here are some good index funds in the US market for different sectors:
- Vanguard Mega Cap Growth ETF (MGK) – Return in the last 5 years = 21.6%
- Schwab Fundamental U.S. Large Company Index ETF (FNDX) – Return in the last 10 years = 14.4%
- Vanguard FTSE Developed Markets ETF (VEA) – Return in the last 5 years = 10.90%
- iShares Global REIT ETF (REET) – Return in the last 5 years = 5.76%
Regulated by the DFSA.
Past performance is no guarantee of future results. Your investment can fluctuate, so you
may get back less than you invested. Consider each product’s risk(s) before investing.
Baraka is not a financial adviser and therefore does not provide financial/investment
advice. Our content is informational only.
Sources:
https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
Regulated by the DFSA
Past performance is no guarantee of future results. Your investment can fluctuate, so you may get back less than you invested. Consider each product’s risk(s) before investing. Baraka is not a financial adviser and therefore does not provide financial advice. Our content is informational only.
