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  • Writer's pictureRevanno

Unlike wine, money doesn’t age well

Updated: Oct 25, 2020

Want to hear a shocking truth? Money ages terribly! What do I mean by that? Well consider this scenario, you have $100 today and you stash it under your mattress. A year later that $100 will be worth less than it did the day you placed it under your mattress. How is this possible? Obviously, the bill still has the number 100 on it, so it’s still a hundred dollars. But the number on the paper and the purchasing power of those dollars differ. This is due to the concept of inflation.

Inflation involves the rise of price levels. Unfortunately, while prices rise, the ability of a dollar decreases. So how do we combat this “aging” of the dollar? In looking at the earlier scenario, it would be best suited to invest the $100 in avenues that will bring in additional dollars. This can be through investing in a side business, stocks, bonds or depositing that $100 in high interest-bearing accounts. Capitalizing on those accounts that generate high interest will be this blog post’s focus. Thus, I will highlight one of the most important races in life – the race between inflation rates and interest rates.

As mentioned earlier, inflation involves the overall increase in price levels and weakening purchase power of a dollar. This is closely related to the cost of living rate. It’s no secret that the Bahamas is a very expensive country whether visiting or residing (“Economy Fears Bahamas Ranked World’s Sixth Most Expensive State”). As such, its annual inflation rate is approximately 2-2.5% (For the sake of illustration we will assume a rate of 2%). That percentage is an important statistic to keep in mind. Essentially you may be best suited to find opportunities that will give you at minimum a 2% return. Let’s take that same $100 from earlier. Consider that our daily expenses in life may go up by 2% in the next year. That means that $100 today will only have the purchasing power of $98 next year (a $2 decrease).

Example – Grocery Shopping:

- Year 2019: With $100 you’re able to get two 5-gallon bottles of water, a bag of apples, two whole chickens, a gallon of milk and a carton of eggs (A bit of an exaggeration but if you’ve shopped in the Bahamas this feels like a reality).

- Year 2020: With $100 you’re able to get everything you got in 2019 with the exception of that carton of eggs. That’s because the prices on items in the grocery store have gone up. Had you purchased everything but eggs in 2019 your bill would have only been $98, which means you would have gotten $2 back in change.

This is essentially how your purchasing power decreases over time.

If you can find an opportunity that gives you a 2% return, thus matching the inflation rate, that means you are able to retain the purchasing power of that dollar.

So now is the time to dispel some misconceptions many of us were taught as kids. The first is if we save and put our money in the bank, we will eventually become millionaires. Before I began my working career, I always thought it was a bit farfetched that a person would suddenly become rich out of the generosity of the bank. However, I understand why many old school Bahamian parents taught this idea to their kids. During the earlier years banks were giving favorable interest rates to deposit savings accounts. It made sense as they were making handsome profits from the loans they were issuing. But of course, the “golden era” of banking is a fleeting image of the past. Unfortunately, during these modern times depositing your cash in a standard savings account that bears 0.01% interest can be as good as storing it under a mattress.

The second misconception is that investing your money is risky because there is a chance you may lose it all. Whenever I hear someone say this I am reminded of the parable of the talents (see Matthew 25:14). People that are afraid to do anything with their money remind me of the servant that buried the one talent his master had given to him. The master was fully aware, that the one talent had lost some purchasing power due to inflation. As per the parable, this servant was chastised for playing it safe instead of taking a chance at investing. I believe this is the mindset we should have as it relates to our money.

As many financial planners would suggest, it would be best suited to keep short term savings in an emergency fund (which can be your standard savings account). However, as it pertains to long term savings it would be best to look at some of the available options in the marketplace. If you read the newspapers or even do research online, you will find that there are several investment management and advisory firms that will provide you with suitable options to achieve your goals.

Note: Most recently, the Government of the Bahamas has announced the issuance of Bahamas Registered Stock (BRS) with interest rates ranging from 3.05% to 6.05%. Click here for details.

For those readers who may think they do not have enough money to start investing, I would recommend scheduling an appointment with a few local investment and advisory firms. There are various products available, some with initial investment costs of $100. The product offerings are mutual funds which are investment tools varying in risk depending on their underlying assets. These funds can be comprised of government bonds (e.g. BRS), fixed income securities or stock. Again, I strongly recommend that you speak to representatives of licensed investment firms to gain a detailed understanding of the underlying assets and strategy related to these funds.

The most important thing to take away is that the race against inflation is not a sprint but a marathon. So be patient and treat your dollars like the investment seeds they are. In the right environment they can thrive and grow exponentially. And at the very least your $100 will retain its purchasing power.

Note: This blog reflects my opinions and is for informational and/or entertainment purposes only. This blog does not reflect the opinions of any organisations with whom I am affiliated. This blog is not intended to serve as a substitute to professional financial advice and guidance. As such, if the reader places any reliance on this blog, he/she alone accepts all risks and damages. Although I am a licensed accountant, please schedule a formal meeting with a financial professional before taking any actions. I reserve the right to change the focus or content of this blog at any time.

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