Most people know that prices rise over time. What they often fail to recognise is how much inflation can quietly reduce the value of their savings.
A retirement fund that looks sufficient today may no longer support the same lifestyle 20 or 30 years from now. The same amount of money will buy fewer groceries, pay for less healthcare and cover a smaller portion of a child’s education.
For Registered Financial Planner Jendee de Guzman, inflation is one of the biggest obstacles people face when they try to build long-term wealth.
“Inflation is a thief,” she says. “If it is not considered in planning, it can be deadly.”
The danger is easy to overlook because inflation does not take money directly from a bank account. Instead, it gradually reduces purchasing power. People may continue to see the same balance on their savings statement without realising that the money has become less valuable.
This becomes particularly costly when someone relies mainly on savings accounts for long-term goals.
De Guzman says the problem affects every generation, not only millennials. Modern life encourages people to move quickly from one goal to another, whether it involves travel, career advancement, advocacy or lifestyle purchases.
Everything can now be done almost instantly, from sending a message to buying an item online. But while people move quickly through their daily routines, they may continue to postpone important financial decisions.
“Before you know it, you are already in your 60s,” De Guzman says. By then, a person may discover that the money set aside for retirement has not grown fast enough to keep pace with the rising cost of living.
Here are three steps she recommends to help protect long-term wealth from inflation.
Build an emergency fund, then start investing
Saving remains an important financial habit, but De Guzman says people should not stop there.
Before investing, they should first build an emergency fund that can cover unexpected expenses such as job loss, medical bills or urgent home repairs. This prevents them from withdrawing investments during a market decline or taking on expensive debt when an emergency occurs.
Once that financial cushion is in place, part of each month’s savings can be directed towards investments.
“There are a lot of investment programmes available for Filipinos today,” De Guzman says.
These include unit investment trust funds, mutual funds, stocks, bonds, exchange-traded funds and insurance products with investment components.
The objective is to place long-term money in assets that have the potential to earn more than inflation over time. However, investors should not choose a product simply because it promises a high return.
Every investment has a different level of risk, cost and volatility. Stocks may offer stronger long-term growth potential, but their prices can decline sharply. Bonds and balanced funds may be more suitable for people who prefer lower volatility, although they may also produce lower returns.
De Guzman also draws a distinction between investing and trading.
A long-term investor buys assets with the intention of allowing them to grow over several years. A trader attempts to profit from shorter-term price movements.
“A trader may earn even more, but you should be trained to participate in the stock market and trade,” she says.
Trading requires knowledge, discipline and risk management. It should not be treated as an easy way to earn quick money.
Set a return benchmark above inflation
Once a person starts investing, De Guzman recommends monitoring whether the portfolio is actually meeting its purpose.
“Make sure that you have at least an average interest rate benchmark so as to surpass the inflation rate,” she says.
Suppose an investment earns 3% in a year while inflation is also 3%. The account balance may have increased, but its real purchasing power has barely changed.
If the investment earns less than inflation, the investor may effectively be losing money in real terms.
That does not mean everyone should pursue the highest return available. Higher expected returns often require accepting greater uncertainty and larger temporary losses.
Instead, the benchmark should reflect the investor’s goal, timeline and ability to tolerate risk. A conservative investor may prefer bonds or balanced funds, while someone with a longer investment horizon may allocate more towards equities.
Investors must also be prepared for market declines.
De Guzman says people who invest regularly and maintain a long-term perspective should not panic whenever markets enter a recession. A lower portfolio value may represent a temporary paper loss rather than a permanent loss, provided the investor owns suitable, diversified and fundamentally sound investments.
Still, recovery should never be assumed. Investors should review whether the original investment remains appropriate instead of holding an unsuitable product indefinitely.
Connect every investment to a specific goal
One of the most effective ways to remain disciplined is to assign each investment to a clearly defined objective.
“Every time you open an investment account, make sure to match it with a particular goal,” De Guzman says.
That goal could be retirement, a child’s education, a future business, a home purchase or a major family trip.
Each one comes with both a timeline and a price tag. The longer the timeline, the more inflation can increase the future cost.
For example, parents with a one-year-old child may have around 17 years to prepare before the child enters college. Tuition fees and other education expenses could be substantially higher by then.
Retirement requires the same forward planning. People should estimate not only how much their current lifestyle costs, but also how much food, housing, medicine and healthcare may cost decades later.
Starting early allows compound growth to do more of the work. It also reduces the amount that must be invested each month.
De Guzman says a person preparing for retirement may need to invest for 20 years or longer, depending on income, desired lifestyle and existing assets. Someone who starts late may have to save much more aggressively or adjust retirement expectations.
Many retirees become disappointed with their pension income because they planned around today’s expenses rather than tomorrow’s prices, she says. Longer life expectancy can make the problem even more serious because the retirement fund may need to cover several decades of daily living and medical costs.
Inflation cannot be eliminated, but its effects can be managed through early preparation, regular investing and realistic financial planning.
“Now that you know about this thief,” De Guzman says, “do your future self a favour and beat inflation today.”
