Protecting the value of money in volatile economy

Saving for a rainy day is hard enough when salaries and wages have not kept abreast with the inflation rate. More so, when the returns on savings that consumers can earn through savings rates are significantly lower than the inflation rate.

An analysis by The Nation showed ordinary savings accounts in Malawi attract interest rates of about two percent to 6.5 percent per annum. This is far below the inflation rate, so ordinary savers lose out on their income the longer they save.

On average, annual inflation is hovering at around 27.3 percent. Meanwhile, banks and other formal financial institutions are offering interest rates of about 3.7 percent, according to figures from the Reserve Bank of Malawi.

This translates to a spread of 23.6 percent. In effect, this means that the money placed in an ordinary savings account loses its value to inflation than it gains in savings interest.

To put it into context, if a person saves K100 000 for one year, the person would have K100 370 at the end of the year, but the real value of that money would be around K70 800 at the same period.

Thus, if a consumer starts with an initial saving of K10 000 and added another K10 000 every month in one year to buy an item worth K120 000.00 at the end of the year, he/she would have K130 370 at the end of the year

However, the value of the product item would have gone up to K154 800 at the end of that year, as such, would not be affordable by the time the consumer withdraws their savings from the bank.

So, is it worthwhile to save in the formal banking system? The proliferation of village banks shows that consumers are looking for something different from the service offered by banks and other financial institutions.

So, should you still save?

But Sycamore Credit Limited personal finance expert Audrey Mwala said people should not give up on saving entirely but should focus on saving when they have a specific goal.

In a WhatsApp response, she said: “Someone who saves, and the price of things goes up, is better than someone who saved nothing at all. It is better to have money of less value than to have no money at all.”

In a separate interview, Old Mutual Malawi Limited financial education specialist Bernad Chiluzi urged savers to use the formal channels, which he said are more secure than the informal saving platform such as the village banks.

According to him, there are better savings portfolios in the formal financial system that offer more lucrative returns on savings and short-term investments. The problem is consumers and savers do not know about them.

Said Chiluzi: “Consumers need to diversify their savings portfolios. People should take the time to familiarise themselves with the options available on the market. They need to take a special interest in personal finance management.”

The financial education specialist says people can cushion their savings from inflation by targeting other savings portfolios such as fixed accounts that offer higher interests for savings than ordinary savings accounts.

Turn the savings into investments

The two financial specialists say the best way to cushion savings from inflation is by turning the savings into investments. The trick is to target “investments that beat inflation”.

Said Chiluzi: “It is important to invest in properties and financial instruments that have a return on investment that is higher than the inflation rate. For example, investing in real estate. The land will appreciate and you can sell the land at a higher price when the economy stabilises.

“People can also set up businesses that will guarantee their growth.”

Agreeing with Chiluzi, Mwala said: “An easy way to invest is to buy shares on the stock exchange. The returns are higher than inflation. Compared to other investments like real estate you don’t need a large capital to start the investment journey.”

Would securing a loan make more financial sense?

What if a consumer wants to invest in the real estate market and has no funds? Would securing a loan for that investment make financial sense?

It may go against the instincts of an ordinary investor to accumulate debt, but debt can work in favour of the consumer if it is properly leveraged and channelled into investments that have relatively higher returns and/or appreciate in value.

Mwala says: “What happens with a loan is that it goes down every time you pay it back but if that money was used for investment the value of the investment goes up each month or year. After say 5 or 10 years you will have no loan but the investment will be there”.

The economy has become a treacherous ground where savings might not be ideal, but it is far riskier to live hand to mouth. Consumers can cushion their investments by learning how to save in portfolios that have higher interest rates, investing in real estate or the stock market or leveraging debt to set up investments.