Friday, January 21, 2011

Inflation - Stranger or Foe?

I suppose many of you are able to define or explain the word "Inflation". If you lookup this word in the internet or books, you will be blown away by the many creative definitions.

In my opinion, the simplest definition of Inflation is "time taken for the value of your money to halve", i.e. time required for your RM10 (example) to halve or the time required for prices to double (example - a bowl of RM5 noodle to double in price)



What is your inflation?

Yeah, I supppose the numbers you plucked from the papers are not exactly incorrect but neither are they correct (depends whether you believe the reports). There are however more than one category of inflation:
  1. Country's Inflation
  2. Personal/Individual Inflation
One common formula of calculating inflation is Rule of 72. For instance, if we assume the inflation rate to be 4%, then 72/4 is 18 - it will take 18 years for the value of your money to halve or 18 years for price of items to double.

However as wise consumers, we are all aware that this is not true. How much was a bowl of noodles 5 years ago? 3 years ago? 1 year ago? So can our country's inflation possibly be 4% and below?

Personal Inflation

There is another inflation that many of us are not aware of - Personal Inflation.  Do you budget or itemize your expenses? If you do, try analysing it. How much did you spend (in general) in 2008? How much in 2009? From there you will be able to ascertain your inflation rate. Of course, if you wish, you can proceed into details - expenses by categories. You can then have an inflation rate for every category of expense. 

What this means is that your personal inflation rate is as important if not more important than our country's inflation. Thus, it is vital that you need to keep an eye on your expenses and income.
Did you just give me a number? Where did you get the number from? Did you get it from the papers or reports?

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