Silent killers: Tax and Inflation

Saving to Investing_2

In my last blog post, I shared with you the comparison of interest rates/rates of return for saving account, time deposit, bonds and stocks/mutual funds.  To refresh you, here is the table again:

“Investment Vehicle” Interest Rate Interest Total Amount
Savings Account 1% 1,000 101,000
Time Deposit 3% 3,000 103,000
Balanced Funds 7% 7,000 107,000
Bond Funds 5% 5,000 105,000
Stocks Funds 12% 12,000 112,000

In this blog post, I will share the two silent killers which we know but really don’t understand how it impacts our money: tax and inflation.

1. Tax:

Everything has a tax, the food we eat, clothes we wear and even our salary.
In SG, tax is called GST and it is 7%.
In PH, tax is called VAT and it is 10%.
Example: 9.90S$ famous star combo in Carl’s Jr. Net of 7% GST, it is actually 9.25S$ which means GST is 0.65S$.

If you check your savings account statement or passbook, you will see a line for interest & another line for withholding tax, which is usually 20% of the interest rate.

tax

2. Inflation:

Definition: “The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation in an attempt to keep the excessive growth of prices to a minimum.  As inflation rises, every dollar will buy a smaller percentage of a good.”  (Read more: http://www.investopedia.com/terms/i/inflation.asp#ixzz3WdYKWQWe)

inflation

Example 1:  Inflation rate for dummies

Assuming that:
1 can of corned beef = 10Php
Inflation Rate = 3%
The following year, 1 can of corned beef = 10.03 Php

Example 2: The evolution of the minimum bus fare in SG using an EZ-Link card:

Jul-10 0.71
Oct-11 0.73
Apr-14 0.77
Apr-15 0.79

Example 3: The McDonald’s Cheeseburger meal price through the years:

Inflation_Mutual Funds Seminar_Eric Menor_21Mar15
Screenshot of Eric Menor’s Mutual Funds Webinar conducted last 21st March captures a 54Php increase in 10 years equivalent to 216% increase for McDonald’s Cheeseburger meal.

Example 4: The Sardines challenge by one of my investor friends, Clyde Arbon.

In 2011, 1 can of sardines = 11.25Php.  With 100Php, I was able to buy 8 cans with 10Php change.

The following year, 1 can of sardines = 16Php.  Assuming I invested the 100Php and I found a relative working in a bank who is giving me a very attractive interest rate of 4%, I now have 104Php buying power.  I think I have more money because of the interest rate but the harsh reality is I can only buy 6 cans with 8Php change.  This is the effect of inflation.

What’s the moral of the story?  Stop buying corned beef, cheeseburger meal and sardines or taking the public bus?  Hahaha.  I wish it were that simple.  It may help us to lose weight but it will not be really sustainable as we might get sick and medical expenses have higher inflation rate.

So what can we do?  We need to learn how to make our money work for us and if we don’t invest we become poorer over time.

Net, interest rate or the rate of our investment return should at least be enough to cover for the tax and inflation because we can never run away from these two silent killers.  Thus, money in the savings account and time deposit is not an investment because it is not really growing and worse the value is actually decreasing because of the effect of tax and inflation.

But you may ask me, “Is it really possible to get at least a 14% return from an investment?”  Based on my personal experience, it is a resounding YES!

My COL Financial portfolio at an aggregate level shows a 21% gain with the top 2 individual stocks having 145% and 56% gain.  Though I have 2 individual stocks that are negative, 2% (gives me dividends) and 8% (a minimum risk I took to invest in a logistics company given my passion for Supply Chain).

My Mutual Funds portfolio at an aggregate level shows a 24% gain.  Detailed breakdown of gains net of sales load: PHILEQT:PM=33%, FMSLEQT:PM=24% and PHILSTG:PM=14%.

I am ecstatic that PSEi has closed above 8000 last Monday, 6th of April.  Right now, although I am buying some small amount of stocks, I am still in waiting mode for COL Financial to start offering Mutual Funds in their platform.  What about you?  Are you still waiting for the right time to invest or worse hesitating to invest?  Well, you can wait all you want but PSEi will not wait for you while tax and inflation are lurking in the dark waiting for you. 🙂

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One Response to Silent killers: Tax and Inflation

  1. UPS Nelson says:

    Reblogged this on UPS Negosyo Boy and commented:
    We neeed to learn how to make our money work for us and if we don’t invest we become poorer over time.

    Interest rate or the rate of our investment return should at least be enough to cover for the tax and inflation because we can never run away from these two silent killers.

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