Understand The Impact Of Inflation On Your Savings - KWSP Malaysia

Myra Athena & Sharifah Norashikin

Date: 12 Aug 2024

Understand The Impact Of Inflation On Your Savings

Inflation is something we all experience, even if we don't always notice it. Essentially, it's the increase in the prices of goods and services over time. When inflation happens, each unit of currency buys fewer goods and services, which means the purchasing power of money decreases.

Think about it this way: remember when RM10 could buy you a lot more than it does today?

For example, in the early 2000s, RM10 could buy several bunches of vegetables such as spinach, long beans, and aubergines, along with fresh fish from the public market. However, nowadays, the same amount might only cover the cost of two types of vegetables. This illustrates the decrease in the value of RM10 over the past few decades.

This decline in purchasing power affects all of us, making it an important topic to understand in our daily lives.

There are many factors driving inflation, including increased demand for goods and services and supply chain disruptions. Additionally, government policies and exchange rates may also play a role in causing inflation.

With inflation, people are increasingly encountering challenges in managing their lives. Skyrocketing rental costs, rising food prices, and the burden of loan debts make it even more difficult for them to make ends meet, pushing them further into financial struggle.

How does inflation affect your savings?

Inflation affects your savings through your purchasing power. The money you set aside for goals like retirement and major purchases such as buying a house, a car, and your children’s education may not be sufficient in the future as the value of your money will decrease over time.

Let's use the price of nasi lemak in Malaysia to understand the concept of inflation:

In 1970, you could buy a plate of delicious nasi lemak, complete with fragrant coconut rice, spicy sambal, an egg fresh cucumber slices and crunchy peanuts, all for just 50 cents.

1980: the price increased to RM1 for the same plate of nasi lemak.
1990: the price rose further to RM2 for the same meal.
2024: you find yourself paying RM3 for that same plate of nasi lemak, with some boujee restaurants charging over RM10 for the delicacy.

The price of nasi lemak continues to rise over the years, reflecting the impact of inflation. What used to be affordable and accessible for many in the past may now require more money to enjoy. This demonstrates how inflation affects our purchasing power, making goods more expensive over time.

What can you do about it?

Managing finances in today's economy can be challenging, especially when monthly income barely meets basic needs. This financial pressure often impedes saving and slows overall financial progress. Here are actionable steps to overcome these challenges:

1) Reassess your spending habits

With prices skyrocketing these days, it’s more important than ever to keep a close eye on your spending and stick to a monthly budget. Start by tracking your expenses to see where your money is going. Then, identify areas where you can cut back, especially on non-essentials like dining out, entertainment, and impulse buys.

To help you plan and monitor your expenses more effectively, we recommend using the Belanjawanku app. This app makes it easier for you to track your monthly and yearly expenses more efficiently and provides useful guidance for financial management. Dowload the app on Apple App Store, Google Play Store or Huawei App Gallery.

2) Establish an emergency fund

When planning for emergency savings, it's wise to have enough to cover three to six months of expenses. This can prevent you from having to tap into retirement savings or other investments during emergencies. Additionally, by placing your emergency fund in a savings account that offers high returns, you can maximise the interest or dividends earned and reduce the negative impact of inflation on the value of your money.

3) Grow your savings

Increase your savings rate to build a cushion against rising costs. Additionally, you can diversify your savings into assets that perform well, such as those that provide returns exceeding the inflation rate. This helps preserve the purchasing power of your savings over time, ensuring that your money continues to work effectively for you.

Read also: Boost Your Savings with EPF Account

4) Revisit your retirement plans

While your everyday savings might be your current focus, don't overlook your retirement savings. If you still have a few years before retirement, it's crucial to reassess your plans to ensure they account for the long-term effects of inflation.

Tools like the retirement calculator in the KWSP i-Akaun app can help project your future needs and savings, while also accounting for inflation. This calculator provides projections of your savings, potential retirement expenses, and the remaining balance at the end of each year.

If your monthly EPF mandatory deductions are not enough to meet your targeted retirement savings goal, you can choose to make voluntary top-ups from as little as RM10, up to a maximum of RM100,000 per year through voluntary contributions.

Explore more details on Voluntary Contribution

If you want to automate additional voluntary savings, there is also the option of Voluntary Excess, where a higher percentage of your income will be automatically saved into your EPF account.

Click here for more details on Voluntary Excess

Although it’s hard to know exactly how long periods of high inflation will last, building knowledge and having a plan in place can help you feel more comfortable about its impact on your finances and lifestyle. Proactively adjusting your budget, investments, and spending habits can make a substantial difference. Furthermore, consulting with a financial advisor can provide valuable insights, helping you to develop a comprehensive strategy aligned with your financial priorities. By taking these steps, you can navigate the challenges of inflation with greater confidence and security, ensuring you're on the right path toward your financial goals.