August 7, 2011 Leave a comment
What is Inflation?
In economics, Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services.
What is Salary?
In simple words, this is the payment made by an employer to an employee.
Challenge Question – Do you think you will get rich by your JOB alone?
Actually, this question always pops-up in my mind. And, I could not find a simple math that will make a simple solution of making me rich thru my JOB. You maybe saying that “Hey, our salary is increasing every year” but, I am very sorry to disappoint you that although our salary were raised up, it’s only enough or may not be enough to compensate for the high inflation rate.
Let me give you 2 scenarios and tell me which you prefer.
A salary increased of 4% and an inflation rate of 5%.
No salary increase and an inflation rate of 0%.
For Scenario 1 : A salary increased of 4% and an inflation rate of 5%. Is the same as you’re salary being reduced by 1%.
Let’s say that you have 1000php monthly income and you buy it a sack of rice. After a year you get a raised of 4% so you’re income is now 1040php (maybe at this moment you are jumping with joy) but wait, the 5% inflation is coming.
With the 5% inflation, the sack of rice that you’re buying is now priced at 1050php. Sad to say that you’re income which is now 1040php is not enough. In the end, this silent inflation will starved you to death.
For Scenario 2 : No salary increase and an inflation rate of 0%. I prefer this one.
Let’s apply the same situation. You have a monthly income of 1000php and it can buy a sack of rice. After working hard for a year, your boss tells you that you will not be getting any raised. I guess your whole world wants to collapse after hearing this.
However, since the inflation was at 0%, you can still buy a sack of rice. Although you get no salary raised, the purchasing power of 1000php retains its value.
Inflation often beats the income from our JOB.
So how can we beat this inflation?
Aside from the active income from our JOB. We should find another source of income that is passive. Passive Income can be generated from our investment (thru dividend payment and capital gains). Also, if you have a property that you can lease or rent to someone, this can be consider as a source of passive income.