Photo by Martin Kingsley

Something happened in Singapore a couple of weeks back and it affected me greatly.

What I knew I read vaguely almost a week later from the evening papers and a discussion on a local forum:

A 15 year old boy was begging in a neighbourhood food centre when a patron called the police on him. Allegedly, he was asking for $2 to buy lunch for his ill mother. The police came and probably took him back to the police post and filed the incident. After that, they escorted him back to the void deck of his HDB (public housing in Singapore). From there, he went up another building and jumped. The boy died.

The story stuck with me for days, and nights. It wasn’t publicized much in the local papers and most of my friends hadn’t even heard about it.

I had been wondering why the story of the ‘begger boy’ (coined by the local paper) had affected me so much.

I came up with many responses to it: I talked to my friends about it, complained about the state of charity organizations in Singapore, and even thought about a startup for it.

In final analysis, I believe the story of the ‘boy’ is really trying to teach me something, something personal, something about how to give.

I am categorically a ‘jaded giver’. Over the years, my personal contribution to charitable causes have declined.

I’ve convinced myself, in the light of the recent mega scams in Singapore’s charitable front, that you’re not giving when you give via these multi-million dollar charity setups. Unfortunately, these organizations have monopolized the attention of the general public through star-studded fundraisers and professionally orchestrated PR.

So, when the biggest of them fell, there was a domino effect on the trust I had on the rest of them. Soon enough, the next in size fell too.

For some time, I gloated. Because I saw it coming and stopped giving when the first fell. Now, I know I shouldn’t gloat.

Rather, I should be thinking about whether my actions (or lack of) had indirectly caused the incident with the boy. You see, I could easily have been at the food centre and refused to give to the boy when he came by my table to ask for that fated $2. It would’ve been so automatic – that looking away and waving of an uncaring hand.

I’m wondering what it would have meant to the boy if there was someone there who willingly gave him $2.

You see, that’s the whole point about the story. Two dollars would’ve solved his problem for the day. A more generous four dollars might have ease a relief from him. A red ten could have make him see that there’s still hope in his lot.

Damn.

So, how should I give?

I tell you, I still wouldn’t trust big charities. Big money corrupts. And frankly, having the who’s-who on the board or stricter regulations doesn’t really convince me at all. It’s simple – big money corrupts. That said, there’s one thing that’ll change my mind – when big charities publish their detailed financials transparently for all to see.

In the meantime, I know I have to continue to give.

My idea is to give directly to the needy.

It’s my money and hence my benchmark. If I see someone whom I think needs a couple of bucks (or ten, or fifty), I’d give it to him/her there and then.

On top of this, I’m going to encourage others to do the same. The more people ‘give direct’, the more beneficiaries will be. It’s a new meme. A new attitude.

I’m thinking hard about how to propagating the meme beyond my network of friends now.

I’ll come up with something and post an update here when it’s ready.

In the meantime, if you agree with me, please go all out and give your monies to those you deem in need. You’ll never know if another ‘boy’ might walk up to you for $2.

Postscript

A reader commented and doubted the story. While I didn’t witness it with my eyes, I did catch the news first off the local Shinmin evening newspapers (I believe its 31 Jul 2008).

I also happen to know that he jumped from Blk 646, Ang Mo Kio Street 61 (but also that he doesn’t live there) and his funeral was held at Singapore Thong Teck Sian Tong Lian Sin Sia at 91 Geylang East Ave 2.

Think I’ll go to the latter to see if I can verify this further.

www.youtube.com/watch?v=aMXRDEpjbug

There’s an old Chinese saying, “how much you eat and how much you clothe is fixed in this lifetime.” Older chinese folks believe that everyone of us can only ‘hold’ so much wealth in our lives. For example, if you can hold $100,000 and then win a million bucks in a lottery, chances are, you’d lose 90% of it in good time.

The older I get, the more evidence I see, in myself and people around me, that this is the way things work.

So, should we just give up and accept what is?

Hell no!

Like any computer programming bug, there’s a couple of ways that you can ‘beat the system’ and get more from life. This post talks about one of them – going on a vibrational spending spree.

The Essence of Spending

Have you notice lately how spending doesn’t seem to work anymore?

I’m not talking about spending money to buy food or daily staple needs. I’m talking about spending money to get yourself something special.

This could have something to do with age. As the years pass, it becomes harder and harder to think of something I really really want. There’s fewer things that I want and when I get them, the excitement of acquisition barely last a couple of days.

And the fact is, I don’t really need these things! They are really just a ‘new and improved’ item over something else I already own!

This got me thinking about spending – why spend? There’s really no good reason for it. When I pare it down, I can only conclude that I spend because it makes me feel good. That is, the final act of paying the cashier for that 12th t-shirt is so that I feel something good. (Am I addicted to spending?)

Can you recall that feeling? That tingle of joy when you buy that new-new thing? The blood rushing to your hands when you unwrap the item from the packaging? The pictures that you play in your mind how you’d be enjoying the product?

I believe these are the real reasons why anybody buy anything today.

The essence of spending is emotional.

The More You Make, The More Your Spend

Have you known friends for at least a decade and see them advance in their careers? And over the years, the more income they make, the more they spend. It’s not like they can eat double or triple the average human intake of food; it’s that they eat more expensive stuff, wear more branded clothing, and drive bigger cars.

In the end, they will still be the same people that grumble about how little they have and how tight the money is.

Fortunately, the next promotion or pay increment is always around the corner. And when it arrives, our dear friends will once again upgrade their lifestyles.

The point I’m making is this: life provides. If you have the capacity for it, it will come, no more, no less.

What is Vibrational Spending?

I learn about vibrational spending from one of Esther Hicks’ Abraham CDs. There are two versions of the exercise.

Version 1

• Put $100 cash in your wallet.
• Throughout the day, spend that same $100 over and over again in your mind.

Version 2

• On day 1, put $1,000 in your vibrational wallet and spend it.
• On day 2, put $2,000 in there and spend it.
• On day 3, $3,000.
• Personally, I write a short entry in a journal about the ‘spending’ part.

In both exercises, the notion of spending vibrationally can be achieved by 1) visualizing your buying, unwrapping, wearing and using the new item; and 2) emoting the same feelings of anticipation, excitement and satisfaction when you buy something.

Both are simple mind exercises that will produce the same results: attracting more wealth into your life.

Why does it work?

I’ve tried the second exercise and it worked. I’m in my second week of vibrational spending and have witness more wealth (OK, money) flowing in my direction.

I think this is how it works – when I emote feelings of spending money, vibrational dollars flow out of me. This creates a gap, or vacuum in my state of being (the state of not enough moola?) and causes life to draw some more of it to me. Since there isn’t an emotion associated with counting money, real dollars have to come into being to fill that void.

Sounds weird? The theory is still work-in-progress. In the meanwhile, why don’t you give the exercises a shot and tell me if it works for you too?

About a decade ago, I put together a retirement plan that will yield a monthly income of about $2,500 when I turn 65 in about 25 years.

The recent chain of events in the financial sector and global economies have set me to re-think that plan again.

This post outlines what these economic trends are and they will impact any retirement plan.

1. Commodity Super Cycle

A super cycle is an economic cycle that last for a couple or more decades. Since the 80′s, the world has experienced a 30-year cycle where equities have boomed. If you have bought stocks of companies like GE or IBM at that time, your portfolio will have grown many folds.

The other side of the coin is commodities. In these same 30 years, prices of commodities like grains, oil, base metals and precious metals have consistently dropped. This is mainly due to advancement of technology and productivity.

Circa year 2000, the trends have flipped and we are now in the first decade of a commodity bull run.

2. Peak Oil

The ‘Peak Oil’ phenomenon is observed first in 1956 when Shell oil geologist Dr M King Hubbard observed that the production of ‘cheap oil’ (i.e. oil pumped in liquid form) follow a normal curve. Beyond the ‘peak’, oil production – whether you’re looking at one well, or an oil field or the production of an entire country – will decline.

Peak oil theorist has calculated that the world’s production of cheap oil has peaked in 2005. Today, the majority of the world’s largest production oil fields have crossed peak. And a growing amount of the proportion of the world’s oil demand is being filled by more expensive forms of oil production, e.g. oil sands in Canada.

This means that the $80, $90 and $100 a barrel of oil prices are here to stay. Even the investment demi-god Warren Buffet warns that $300 a barrel oil is possible.

If you can see that the world’s economy is driven by oil, you can then logically deduce that with the increase of price of oil, the price of literally everything else will follow.

3. Money Supply

Ever since Bretton Woods, the US dollar is no longer backed by gold. Which means, the dollar, not just the US alone, is backed in full faith by the government, and nothing else.

I’m not saying that government henceforth prints money out of thin air – there are other forces that refrains them from reaching into this cookie jar. But, without the link to a physical medium that is limited in supply, governments end up taking the easy way out in solving economic hangovers.

The result is what you see today, where M3 (the broadest measure of money supply in a country) of many countries are now growing at double digit rates.

4. Price Inflation

The combination of the above factors result in inflation, which by now, you’d know very well.

Inflation is the single biggest threat to anyone who saves. Since any retirement plan is essentially a savings plan, they are also threatened by inflation.

Let me illustrate.

In 1998, I thought that at 65, $2,500 a month would be enough for me to lead a fairly comfortable lifestyle. My naive thinking is that 1998-dollars is the same as 2033-dollars.

So, my plan revolves around a number of instruments ranging from savings & fixed deposits, mutual funds, blue chip stocks, term insurance and the government-operated pension scheme.

All these still add up to an income of $2,500 in absolute dollars in the year 2033.

But, inflation as reported by my government is 7%. And in my honest opinion, real inflation is even higher, I’d dare say 10%.

Working backwards, my $2,500 a month income in 2033, against an inflation of 7%, will only afford me a lifestyle of about $500 today.

I don’t think I can survive on $500 (2008-dollars) a month. Which means, I have to revise my retirement target up.

5. Stability of Financial Institutions

The almost-bank-run in UK’s Northern Rock was a shock to the financial industry – it was the first in almost 100 years.

The Northern Rock financial debacle was linked to the US property subprime problems. And ever since the US subprime crisis first broke into mainstream news in August 2007, nary a month will pass without another related financial blow-up.

So, you’ve heard of the CDOs, the ABCPs, the monoline insurers, and now SIVs.

I’d be watching the financial results of the world’s biggest banks very closely. Market watchers have been predicting bad to worse results.

As this unfolds, I will be re-considering many of the once-considered secure savings or investment plans.

As I write this, news just broke that CitiGroup is looking to retrenching 10% of it 375,000 global workforce.

6. What to do with Savings and Fixed Deposits

There was once when the almighty fixed deposit is the cornerstone of any good retirement portfolio.

At today’s inflation rates and uncertainty of financial institutions, I am cutting my cash stash in savings and FDs to a minimum.

In Singapore, these yield 0.25% – 2.5%, way below the government’s published CPI rates.

7. What to do with Mutual Funds

There are many funds to choose from. The important thing is that you make your own choice. No matter how big a portfolio you have, understand that fund employees are rewarded based on fund subscription and not the growth of your portfolio.

This is what I call taking your power back.

If you don’t want to make time to understand what’s happening in the world, you really cannot blame anyone when your investments take a beating.

Fund managers will rate their funds based on a risk factor of 1-10. Despite the change of the super-cycle and the advent of the commodity bull cycle, commodity-related funds are still ranked a 10 on risk!

Make your own judgement call and consider switching your mutual funds portfolio to those related to agriculture, metals, energy and infrastructure.

8. What to do with Blue Chip Stocks

Once again, as with mutual funds, don’t buy simply because your stock broker recommends it. Do your own research and make your own calls.

One of the most compelling reasons to invest in stocks is dividends. Look for stocks that have consistently paid out high dividend rates over the last decade. And, always reinvest dividends.

Don’t be limited to only stocks available in your country. Think global and join a local online securities firm that lets you buy stocks from major markets. Check that your country has double-taxation arrangements with the other country so you don’t get taxed twice on your dividends.

My own search for high yield dividends stocks in the burgeoning commodities bull market has taken me all the way to Canada.

9. What to do with your Insurance

Here, I am talking about your investment type insurance. At any time, you should always have sufficient coverage for life and medical purposes.

Run through all your plans with your insurance agents and ask them to explain the risks in the investments that are taken by their firms with your plans.

Consider closing those plans that have invested in the ‘wrong’ markets or are generating less-than-inflation returns.

10. Hedge in Gold or Silver

From the beginning of 2008, gold has gone up close to 14%, and silver in excess of 30%.

Many analysts believe that both are due for a big correction soon. They analyze these precious metals as if they are base metals, e.g. copper and nickel, where normal market forces of supply and demand play a big part in pricing.

I believe people who accumulate gold and silver think of them as a store of wealth. Both are very good hedges against currency devaluation.

The price of oil expressed in ounces of gold has been fairly stable in the past 5 years. And it should be rightly so. Since a barrel of oil, well, is still a barrel of oil. Looking from this perspective, it is the value of money that has diminished.

There’s a lot more that I can write about this topic. In this installment, I hope to convince you that you should take another look at your retirement plan and rework it so that it delivers the results that you want.

In today’s age of easy credit, real luxury lies in being debt-free. I can still vividly recall a couple of weeks back when a younger friend, W, walked into my office and proclaimed how relieved he felt. W had trimmed his debt down 80% and was only a couple of months from clearing them totally.

Being Asian and a Chinese Hakka (a dialect tribe famous for thriftiness), I can easily switch to a ‘saving’ mode whenever the need arises. In fact, the mode will kick in automatically and dependably after a short spending spree.

This post delves into this Hakka man’s bag of tricks and summarizes them into 10 easy steps for you to start saving more money.

1. Track Your Spending

For at least one month, be unusually diligent and record all the expenses you incur – including cash, cheque and credit. If you have automated payments set up in your bank account, record those too.

Separate all your spending into 2 groups: committed and actionable.

Committed expenses should include home mortgages, car loans, student loans, insurance premiums, parents’ allowance, etc. These are financial commitments you cannot reduce or get out of.

Actionable expenses include your meals, coffee breaks, grocery, transportation or petrol, utilities bills, entertainment, etc. These expenses can vary widely depending on the individual.

The idea behind tracking and organizing your expenses is that you get a good snapshot of where all your money is going.

2. Set a Goal

Once you know how much you spend in a month, compare it to your nett take-home income and set your savings goals as follows:

• (Committed + Actionable) > 110% of Income : you are most likely in debt and not in a position to get out of it right now. Start saving aggressively now!
• (Committed + Actionable) ~ 90% of Income : you could be in debt but you can take care of it. Focus on clearing your debt and set a goal to save another 10% out of your income.
• (Committed + Actionable) < 80% of Income : you are a conscious saver and living well within your means. Maintain your current lifestyle and all should be well.

In all cases above, I am recommending that you save at least 10% of your take-home income and if you are already saving some, try another 10%.

Using the above, you can compute the exact amount that you need to save per month. That amount will have to come out from your Actionable Expense items.

3. Stackbacks – a Brute Force Method

If you spend more than you make and low on self-discipline, Stackbacks is just the medicine for you.

The Stackbacks technique works because it prioritizes your savings as the first ‘expense’ item that comes out from your paycheck. You will also be leaving your credit cards at home and giving yourself access to funds you plan to spend. In short, Stackbacks is about cutting those supply lines so you ultimately cannot spend.

I’ve used the Stackbacks method to get accustomed to a new, reduced expenditure pattern. I kept to it for 2 months, just long for the habit to form.

4. Saving on Food & Groceries

• Lose Weight – If you are on the heavy side like me, go on a diet (and exercise) plan. Don’t waste money joining gyms and weight-loss programs, do it by eating less, walking and jogging. I find it a lot easier to keep to my dieting and workout schedule when I justify it further with the savings.
• Become a Foodie – Join the local foodie forums to learn about places that serve great food at great prices.
• Learn to Cook – for some time, it has been less economical to cook at home, especially if your household is small. Raging commercial rentals and rising staple food costs are changing this around. Now is a great time to learn all those great dishes from mom. Eat better and save at the same time! If there’s only one or two of you, get to know your neighbors and organize cook-nights on rotation.

5. Saving on Utilities

• Choose Energy Star rated electrical appliances on your next change of televisions, fridges, washing machines, PCs, and so on. Be aware of how much electricity costs in your country (expressed in $/kilowatt-hour or kwh) and keep it handy to compute savings from these appliances.
• Switch off at the wall – appliances with a standby mode continues to consume electricity even if they are switched off. These appliances is truly turned off only if you switch off the source at the wall. You can save around 10% of your electric bills simply by turning off everything you don’t need at the wall.
• Set your air-conditioning to 25 degree C – this is the optimal productive temperature, comfortable and no jackets required.
• Install water-saving nozzles on all your taps and shower heads

6. Saving on Transportation

• Drive less – I started a while back designating Saturdays as Zero Emission Day. This to play my part on saving the environment by not driving my car. I either take public transport or walk on these days.
• Don’t speed – find the ‘sweet spot’ on your gas pedal where the engine doesn’t kick into overdrive. It helps if your car has a fuel usage per 100-kilometers. I find that you keep up with city traffic at a less than 10l/100km.
• Plan your routes – whether driving or taking public transportation, you can save by optimizing your travel routes.
• Walk when you’re not in a hurry – when the weather is cool, I’d choose to walk for distances up to 30 minutes.

7. Saving at Home

• Watch less television – my informal survey amongst friends reveals that families with higher than average utilities bills all have at least one TV-addicted child or elderly in them. You don’t have to get rid of them, just convince them on a more balanced intake of television, magazines and books.
• Choose laptops over desktops because laptops consume less than 50% of electricity consumption of desktops.
• Stamp out bit-torrenting – this is the single reason why your teenager has to keep his/her computer on all the time. Educate them on anti-piracy and wean them off it. A typical desktop PC kept on for over 24 hours will consume 216 kwh per month (~$50 in Singapore).
• Sun-dry your laundry whenever possible.

8. Saving on your Shopping

• Always wait for sales season – there’s always one coming around the corner. Never buy on impulse.
• Join loyalty programs for brands or shops that you frequent and spend a fair bit at.
• Always ask yourself ‘do I really need this’ every time you feel the urge to buy something. You don’t have to deprive yourself but neither do you have to own that 35th pair of heels.

9. Saving on Luxuries

• Workout at a friend’s condominium’s gym. Brisk walk or run if that is not available.
• Watch movies on low-price days. In Singapore, the price differential is 50%.
• Work at Starbucks if you are a freelancer. For the price of a grande brew of the day ($3.50), you get desk space, piped music, wall plug for your laptop, free wifi and the sweet aroma of coffee beans!

10. Reward yourself

• Get a little something for yourself from the the savings you’ve made. When I did the things in the Utilities section and saved about $100 in the first month, I bought myself a DVD as a reward.
• Use those bragging rights – I showed off my utilities bill to family, friends and colleagues and shared with them how I did it. Everyone loves a money-saving tip and it also makes wonderful dinner conversation.

I hope the compendium of tips above will motivate you to do something about saving today. Please share your personal saving experience and any other cool tips that you might come up with!

This is a follow-up article from Why you should care about Inflation.

Over time, inflation will erode both your standard of living and your savings. I am a firm believer that life should improve constantly. Once I identified inflation as a threat to that, I started learning and trying out ways to beat it.

This post summarizes 8 ways that I’ve used to counter inflation.

1. Reduce expenses

Prices are going up and you’re probably not making more money. The right thing to do is to reduce your expenses to a level that you have at least 10% surplus.

Reducing expenses doesn’t always mean lowering your standard of living. We really do live in an age of excess and if you give proper consideration to your consumption patterns, you’d be happy to find that you can be just as well off spending less.

2. Get out of debt

Pay off all your credit card bills, personal loans and bank credit lines first. For big ticket debts like your car loan and home mortgage – take a cold hard look if this is taking too big a chunk out of your paycheck. If you cannot save due to these, I’d recommend you downgrade to a cheaper alternative.

Debt is a trap – in that if you do lose your source/s of income, it will come back to bite you with high interest rates and enslave you to long periods of repayment. Get out of debt if you don’t want to work for the banks for free.

3. Build new sources of income

No one can give you a guarantee on your income. Even if you work for a Fortune 500 company, you can be retrenched. The buck stops with you. You have to build new sources of income.

I am such a believer in this that I would encourage my employees to think do this.

New income streams can come from freelancing, income stocks, renting an extra room, making and selling pastries and even blogging. Don’t force yourself to do something you don’t like, do something that you are passionate in and make some extra dough with it.

4. Save, save, save

Start saving once you are cash-flow positive (income > expenses). Be regimental about saving because we are weak to the onslaught on commercial advertising. I would even open another savings account and transfer my savings there the moment my paycheck comes in.

First, build up a savings of 3-6 months of your basic must-have expenses. This is your own insurance against any emergencies. If possible, save in a strong currency in a facility that offers minimal exchange costs and yields some interest.

Evangelize the virtues of saving to close family and friends. I’m being a bit selfish here but if your close ones don’t save, they might turn to you in their hour of need. I’m not saying don’t help them, but prevention is always better than cure.

5. Invest for dividend income

Once you’ve build up your emergency savings, you’re in a position to invest. Note that I said ‘invest’, not ‘trade’. When you invest, you buy a stock and keep it around for 3-5 years.

Dividend stocks are stocks of companies that have demonstrated a history of high dividend payouts. These companies should not be in an industry that is at risk now (read: banks).

For now, you should be looking at energy, precious metals, agriculture and commodities. Talk to your trusted professional financial adviser about this. If you don’t have, get one.

One caveat: don’t take everything that your financial adviser tells you, do your own research, learn to manage your own money. There’s this saying in Chinese “你不理財，財不理你”. It’s kind of phrasal palindrome that reads ‘ni bu li cai, cai bu li ni’ which means if you don’t manage your wealth, wealth will not come to you.One tip: look out for energy income trusts that pays out a hefty 1%+ dividend every month (yes, month, not year).

6. Hedge in Gold

To ‘hedge’ means to have something that protects you against some potential financial loss. Here, I’m talking about the financial loss of the value of your currency, when inflation strikes.

Gold has always been the first hedge against currency. That is to say when currencies lose their value, the price of gold goes up.The allocation of gold in your portfolio should be according to how bad you believe this financial (subprime, CDO, SIV, ad nauseam) debacle will play out. Allocate more if you think it’s going to be worse.

The following points are what I’d call “maybes”. They greatly depend on the local market conditions.

7. Buying a house

It’s always reassuring to have a roof over your heads. There’s a school of thought that argues that since inflation is abound, your home mortgage will become ‘cheaper’ in the future. I don’t buy that because there’s more parameters at play here, such as interest rates.

In fact, my believe in home ownership is to do it with a minimal mortgage, i.e. pay as much as you can upfront. This way, you are protected from the banks calling on your mortgage should property prices tank.

Disclaimer: I don’t own property but is waiting on the sidelines for prices to correct in my country.

8. Trade in the stock market

Once again, do this if and only if you know what you’re doing and only with money you can afford to lose.I will strongly advise against using margins (a loan from the securities house), trading in derivatives such as options or warrants, and forex and futures trading.

Disclaimer: I am not financially trained or certified to give anybody any financial advice. The tips above are derived from my own experience. As such, I cannot be responsible for any losses that you might get as a result of this.

Do you have your own ways of beating inflation? Please share them here.

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.
~ Sam Ewing

We only have to go to a local grocery to know what inflation is all about – rising prices. The worry we have is that our income is not rising as fast and we don’t really know when it will get better.

I am going to put to you that inflation is here to stay and you cannot sit and wait long enough for it to go away. This article explains the cause of inflation and why you should care about it.

What causes inflation?

It’s actually very simple – when the money supply in an economy increase at a faster rate than the goods and services produced, prices go up and you have inflation.

We can turn to the M3, the broadest measure of money in an economy, and its rate of change to get an idea how fast money supply is growing. The table lists M3 rates for the stated month compared to that of a year ago.

   Australia   16.0%   Jun'07
   Canada      12.8%   Nov'07
   China (M2)  17.3%   Mar'07
   Eurozone    12.3%   Oct'07
   Russia (M2) 44.1%   Aug'07
   Singapore   23.6%   Jun'07
   UK          12.4%   Oct'07
   USA*        15.0%   Nov'07

* The United States Feds have stopped publishing its M3 since March 2006. The rate above is derived from widely quoted figure from ShadowStats.com.

How much inflation is there?

To do anything about inflation, you need to first know how much inflation is there.

For the man on the street, inflation is presented in the form of Consumer Price Index (CPI) – an index measuring the average price of consumer goods and services purchased by a household. I tried reading up on how my government calculates the CPI but the statistical models used were simply too overwhelming.

My instincts and day-to-day experiences tells me the official CPI is understated.

Instead, I use a simple, but fundamentally correct formula to derive an inflation number which I can live with

Inflation = M3 rate – GDP rate

So, in Singapore, the inflation that I’m dealing with is (23.62 – 7.7) = 15.92% (I’ll round it up to 16% for discussion purposes).

How does inflation hurt you

Inflation deals you a one-two punch in terms of your financial planning. First, you end up savings less because a bigger portion of your income goes to expenses. Second, your current savings gets eroded over time.

Here’s what a savings of $10,000 yielding 1.5% interest will buy me in terms of the same amount of goods in the first year:

Year  Principal   Buys in Yr 1
  1     $10,000     $10,000
  2     $10,150      $8,526 (10,000 x 101.5% x (1-16%))
  3     $10,302      $7,269
  ...
  5     $10,613      $5,284
  ...
 10     $11,434      $2,381

So, in 10 years, the $11,434 in the bank will only buy you $2,381 worth of goods and services in Year 1 dollars. In other words, the purchasing power of your savings are eroded through inflation.

I have another 24 years to my retirement age in Singapore. Using the same formula but more optimistic parameters (inflation 10%, savings interest 2%), I will still see my initial savings of $100,000 dwindle to barely $14,000 by the time I hit 62.

To see my savings devalue by as much as 86% is a big concern. In part 2 of this article, I will be sharing about what I’m doing to beat inflation.