I believe that most of the people worry about the inflation. Inflation not only can increase the cost of goods but also able to drag down your living standard. In the other words, it causes our money less value and decreases our purchasing power. You can buy less thing with RM5 today compare to ten years ago. We can have two plates of mee with RM5 ten years ago but today we can buy less than two plates. So, this is inflation! As a financial planner, they should know how to calculate the future possible inflation rates and advise investments that able to beat inflation.
As an individual, it’s better to know how to calculate your inflation adjusted expense in the future. If your current expense is RM1,000 per month, in the future, let say after 20 years, an expected inflation rate of 5% or 7%, then how can you calculate the amount required to bear for each month expenses at that time?
Here is my simple & effective calculation method that you can use to calculate the total amount you required each month after 20 years and expected inflation rate is 7%.
The formula is = Current Amount x (1+inflation%) ^ Number of Years
So, let say you have a current monthly expense RM1,000 and after 20 years, it would be:
=RM1000 x (1+0.07) ^ 20 (use MS Excel sheet to calculate this)
If the inflation rate is 5%, then you will get a consolidated amount of 2653.298 as well.
Some people might think that inflation rate declared by government is not accurate as they tend to lower the inflation rate to reflect the economy health of our nation. That’s why we need do our own inflation rate based on our purchasing index. We need to list down the price of goods for current year and previous year in order to calculate our own inflation rate by using the same formula above.
If you are 30, you should be having at least RM100,000 by now! Also, be aware of the inflation rate. The RM100,000 that you might have today, 10 years from now, would only have the purchasing power of RM51,000.
When we are young, we’re excited to buy our cars and houses and all your favorite stuff. All these personal liabilities take away all the money that you should be investing for your future. So, try to do some investment which can guaranteed good return and I assure you, when the time comes and when you really need the money, you’ll never regret having invested early.