There are two things that expatriates will notice:
Exchange rates: In 2004 you could exchange 2.2 SGD for every euro. Today, it’s approximately 1.6 SGD. This in itself is not inflation. It’s a valuation based on how good or bad an economy is. In this case, it reflects Singapore’s wealth in comparison to Europe.
Consumer prices: In 2004 you could get a Taxi from one end of Singapore to the city centre for a few Dollars. Today, the starting fee often is already $ 3,90 or more.
Maybe you think this is a boring subject, but it might turn out to be one of the most important things to learn for your personal future!
While time is your best friend while investing, getting accumulated returns, inflation, currency devaluation and consumer price corrections can be your worst enemy over time. Understanding a bit more can help you.
How that works? First you need to understand what I mean: If you had 100 SGD last year, today you can buy the same as if you had 95 SGD last year. That’s inflation for 1 year - a 5% difference, given nothing else will change. You need compensation for this. But how? The 1% interest most banks offer is just not enough. If you are lucky your company will pay you extra. How bad is it? Some countries are really experiencing problems. For example: Ethiopians see consumer prices rise 18 % annually for the last decade. That is no problem if your paycheque rises 18% a year. Does yours?
Obviously some numbers are even more shocking. Some are due to internal problems, like a 1097% prise rise in Zimbabwe in 2006 during the civil war. Until today, Zimbabwe trades in foreign currencies as their own currency is not sustainable.
Let’s look at Carl; living in Singapore ten years ago, he invested in property in India. He did not want to hear advice not to do so. Prices went up 6% annually and his value in Rupee gained approximately 30%. Nothing extreme, but, at first sight, not bad either. He is selling today. One would expect this must be a happy day for Carl. He is selling for 4,223,000 and bought for only 2,500,000, so he is making a profit. Unfortunately Carl forgot one thing, and he is soon about to find out.
In the last ten years the Rupee has devaluated. He did notice that the rental payments were not as good anymore, but did not think too much of it, as he had plenty of income in Singapore.
If we look closer in this case you will see that he actually invested S$ 100,000 at the time and now will now get back S$ 42,000. That’s why Carl is not happy after making the exchange.
This might just as well happen to your USD or to your Property in Malaysia.
Many products are being produced in countries like India. Devaluation will have an effect on you and me, this we cannot change. But does it have to be as bad as it was for Carl? First you need to understand: If your country does better than others, the value of your currency normally goes up compared to the value of other currencies - and the other way around. Not always though. The problems with the Rupee have other reasons. The economy there is good but they have other problems.
So what does the combination of things do to you? Inflation 5%, currency down 5% and costs up 5%, all small numbers, but they do add up. The World Bank has produced figures of inflation over the world at a 4.46 % rate over the last decade. On the basis of this figure, I calculated that consumer prices of more then 180 countries rose an astonishing 9.49% on average over the last decade. This is quite a shocking number. If you take out some of the most extreme cases, you might say that a 6% price rise rate is still a fact. These numbers affect everyone. Can you do something to protect yourself?
Whether it is cash in your bank or in a drawer, it does not really make much of a difference, given the interest rates banks offer. Keeping cash is the easiest way to lose value. Putting your money in a regular account is probably the worst you can do. For example, if you have enough to pay for your kid’s university today, but put your money in the bank for ten years because they are still young, you might be in for a surprise.
Instead, you will be better off to invest your money and keep up with inflation. Make sure it is well diversified. If you do not know how, do look for a qualified independent adviser that offers a broad range of products to suit your needs.
Currency risk is an additional risk that everyone should consider before investing. Some people believe in extra diversifying in multi currencies. While investing helps, the question is: “Do you need this extra risk, or is investing in your own currency the better option for you?” This depends on your outlook on things.
A very important misunderstanding is that bank advisers can offer the same services as financial service advisers. They can’t, and most of them only sell their own products. As such, banks actually add additional risks many people are not aware of, not to mention additional costs. But whatever you decide on, make sure you do not wait with investing your money. Waiting can cost you a lot - even if your investment cannot completely keep up with inflation, it’s likely that you are better off than having your money in the bank where inflation will eat it.
This is also important while saving for retirement or other long term goals. If you don’t invest you might end up with much less. However, this is not an advice to just buy an investment and those who do should seek advice.
So is this boring? Maybe so, but at least now you know what to do.
Walter van der Boor is a Dutch expatriate currently living and working in Singapore as a licensed financial adviser representative.
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