Financial Literacy Understanding Basic Terms

What is inflation and how does it affect your term deposit?

The price for goods and services usually increases over time, which is called inflation.

Meaning simply, we have to spend more money each year to buy the same amount of goods. Inflation increases the cost of living and reduces the purchasing power of each dollar.

If you plan to achieve long-term financial goals such as saving for your children’s university fees, or funding your retirement you will need to factor in the effects of inflation.

Inflation will cause university fees to increase in the future, so you need to make your savings work for you and earn a decent return, to cover this additional cost.

Investing in a term deposit paying a decent return can help you to safeguard the purchasing power of your money, so long as the interest rate on the term deposit is higher than the expected inflation rate.

For example, say you invest $5000 in a term deposit paying 4 per cent per annum.

If the inflation rate is 3 per cent over the same term, the value of your money will have increased by more than inflation, and so you will make a positive real return of 1 per cent on your investment.

However, if inflation exceeds the interest rate, the purchasing power of your money will have fallen in real terms, and you will be worse off.

So looking out for a decent interest rate for your term deposit is important to helping you to achieve your financial goals.

The current inflation rate is 2.3 per cent as seen on the Statistics Fiji website today

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