It is important to understand how inflation can impact on the value of your money over time.
Short-term investments are not suitable for the long term because returns on short-term investments will not outperform inflation. The example below highlights the effects of inflation on your buying power over time.
Inflation measures how prices of everyday goods and services increase on a yearly basis. An increase in inflation lowers the buying power of your money.
The table below shows how the value of R10 000 today becomes less over time. In the example, you can see how the value, that is the buying power, of your money decreases over time (assuming inflation increasing annually at a rate of 6%, and buying power as at 2012).
| Inflation | |
|---|---|
| Value of lump sum | How lump sum’s buying power decreases (using values as at 2012) |
| Today | R10 000 |
| In 5 years | R7 473 |
| In 10 years | R5 584 |
| In 15 years | R4 173 |
| In 20 years | R3 118 |
| In 30 years | R1 741 |
| In 35 years | R1 301 |
When investing for the long term, you need to know
that your investments will perform better than the
rate of inflation so that the buying power of your
money is not reduced over time.
The different places to invest your money are referred to as asset classes. These include shares (also known as equities), bonds, cash, property and alternative investments. When you invest, you basically decide which asset classes you want to spread your money across and in what proportion. You can place your money in the various asset classes either directly into a portfolio or an investment vehicle offered by a service provider. Work with an accredited financial planner when you determine where to invest your money for the long term. In a similar way, a retirement fund’s trustees, with the help of their expert advisers, will also do this on behalf of the fund’s members.