Inflation is described as the increase in prices over a period of time and a fall in the purchasing value of money. This is why things increase in price over time, inflation is also known as the worst tax, it slowly eats into your money without you noticing it. This is a guide on how to protect money from inflation in South Africa.
The inflation rate in South Africa is currently around 4%. Let’s say you had R500 000 and decide to store it in a safe. Your money would lose value by 4% every year, that’s R20 000. R1.5 million today (2020) has the same purchasing power that R500 000 had in the year 2000. Money loses value at a staggering pace, it’s very important that we protect ourselves from this. All this happens while income levels remain stagnant. Here are the best ways to protect your money from inflation in South Africa.
The best way to protect money from inflation is by investing it in inflation beating assets. These assets should pay you an interest rate that is higher than the inflation.
1. Bonds
Bonds are issued by the government or corporate entities. They are a way to raise money from the public. Bonds are a debt based financial instrument, you are basically borrowing the government or corporates your money and they pay it back with interest.
Bonds are the safest of all the investment assets, the government is not likely to ever default on its loans. As a bond holder, you are considered as a creditor to the company and will be prioritized over shareholders should the company liquidate.
The best thing about bonds is that you can choose to invest in inflation linked bonds. This guarantees that your money will always be safe from inflation even in the event of hyperinflation. These bonds might earn you an interest rate of 5% that is adjusted for inflation. This is by far the best way to ensure that your money will be safe from inflation. You can invest in bonds for a minimum of 2 years and a maximum of 20 years in some cases.
2. Mutual funds
Mutual funds pool money from different investors in order to invest in different securities. These securities include bonds and stocks, most mutual funds have an inflation beating interest. However, they might be vulnerable to a stock collapse, since most mutual funds have about 60% of their portfolio in stocks.
There are some more balanced mutual funds that spread out risky equally between different securities and sectors. This makes them extremely safe; you can usually earn between 8 and 10% from mutual funds. That’s more than double the current rate of inflation. Not only will you beat inflation, you will increase your wealth.
3. Real Estate
Real estate is a very good way to protect your money from inflation. The value of the property appreciates at a rate that is higher than inflation. It’s even better when you rent the property out in order to get rental income. Rental income increases with inflation.
Real estate is one of the safest businesses you can start and it’s easy to manage. The returns from Real Estate beat most other investment assets. Your returns will come in the form of the money that you make plus the appreciated value. Not a lot of people can afford to own real estate in South Africa. Which is the main downside.
4. Fixed deposit accounts
Fixed deposit accounts normally span for a maximum period of 5 years, at which your interest rate is fixed. They usually offer higher interest rates than savings and money market accounts.
African Bank offers an interest rate of 12.22%, this does not only qualify as a way to save money but an investment. The return that you get is 3 times the current rate of inflation. This means that you will be earn an interest of 8% in real terms, which is something you seldom get from any investment asset.
