Why knowing your personal inflation rate can help you to protect your wealth

August 12, 2022

Over the past few months, you can’t have failed to notice that the cost of living in Singapore has been rising. The price of everything from food to fuel has increased, as global supply chains have been disrupted by the war in Ukraine and further lockdowns in China.

But while everyone has been affected by the rising costs, you may not know that their impact isn’t being felt equally. In fact, depending on your spending patterns, it could hit you harder than most.

According to the Straits Times, people whose household incomes were in the highest 20% bracket have felt inflation the most keenly in the past few months. According to government data, they saw a 6% annual increase in the cost of living, compared to 4.2% for the lowest quintile and 4.9% for those in-between.

If you want to protect your wealth effectively from rising costs, it’s important to understand what your personal rate of inflation is, so read on to find out what you need to know.

Over time, inflation erodes the real value of your money

To put it simply, annual inflation is a measure of the increasing cost of goods and services.

Typically, a small amount is seen as beneficial as it keeps the wheels of the economy turning. After all, when a product might be more expensive tomorrow, it encourages people to go out and buy it today.

That being said, too much inflation can often be a bad thing. It can quickly spiral out of control, which is why central banks work so hard to keep it at a manageable level. Unfortunately, as we discussed in a previous article, recent global events have caused the cost of living to surge in the past few months.

To calculate the rate of inflation, the Department of Statistics looks at the changing cost of a basket of goods and services. This includes around 6,800 brands from 4,200 outlets in Singapore.

The make-up of this basket is usually based on annual surveys about household expenditure, so that the data is as representative as possible. Typically, the main areas it considers are the cost of:

• Food

• Transport

• Healthcare

• Utilities

• Recreation

Of course, the goods that make up the basket don’t always rise in price at the same rate. That’s why, depending on your own individual spending habits, you’ll have your own personal inflation rate.

For example, in the past few months, international sanctions on Russia have caused the price of oil to spike, leading to a rise in the cost of fuel. This means that if you travel a lot, such as flying back home to see family and friends, then your personal inflation rate might be higher than average.

To see how much inflation is affecting you personally, all you need is some simple maths

To calculate your own personal inflation rate, all you need to do is compare your expenses to the previous year.

First, you need to go through your bills to work out how much you spent in July. For example, this may include groceries, utilities, fuel, entertainment, and mortgage payments. It’s particularly important to look at your regular expenses, rather than just one-off purchases.

Then, check your bank statement from July 2021, and subtract this amount from the sum that you spent in July 2022. This helps to work out your overall change in spending.

Then, all you need to do is divide the difference by the cost of your monthly expenses for July 2021, multiply this number by 100, and the result is your own personal inflation rate.

For example, let’s say that your household spent $13,000 in July 2022, but only $12,000 one year prior. This means that your monthly outgoings rose by $1000 over that period.

To work out your personal inflation rate, all you need to do is divide $1,000 by $12,000, which gives you 0.083. Once you’ve multiplied that by 100, you can now see that your monthly outgoings have risen by 8.3%.

Understanding the impact of inflation can help you to plan your finances more effectively

When it comes to building your wealth, understanding how much inflation is likely to affect you can be very useful.

For a start, it can be helpful to know when you’re trying to stick to a budget. By identifying the areas of your spending that are rising at the fastest rate, you can easily know what to cut in order to save money.

On top of this, it can also help you to make better decisions when building your wealth. Since inflation eats away at the real returns of your investments, you may need to raise your tolerance to risk.

As we discussed in a previous article, this can help you to achieve stronger returns and grow your wealth despite rises in the cost of living. Of course, it can also lead to a fall in the value of your portfolio if the market dips, which is why it’s important to seek professional advice first.

Knowing your personal inflation rate can also be highly useful when you’re approaching retirement, as it will help you to see how much additional income you might need to draw each year. This information can help to allay any worries that you’ll run out of money, as you can more accurately plan your withdrawals.

Get in touch

If you’re concerned about inflation eroding the value of your wealth and want to know what you can do about it, we can help. Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.