Inflation refers to the general rise in the price of goods and services over time, which erodes the purchasing power of money. In Nigeria, the current inflation rate has been steadily climbing, with significant impacts on the cost of living. This trend affects every aspect of the economy, including savings. For many, the value of their money saved in traditional accounts decreases as the cost of goods and services increases.
Why is it crucial to save during inflation? The answer lies in maintaining financial stability. Even though inflation diminishes the value of money, strategic saving can help mitigate these effects. The goal of this article is to provide practical advice on how to save effectively during inflationary periods in Nigeria, ensuring that your financial health remains intact.
One of the most important strategies during inflation is diversification. Rather than keeping all your money in one place, spread it across various assets that have different levels of risk and return. For instance, while savings accounts may offer lower returns, investing in fixed deposits, stocks, real estate, or commodities like gold can provide a hedge against inflation.
| Asset Type | Risk Level | Potential Return |
| Fixed Deposits | Low | Medium |
| Stocks | Medium | Medium to High |
| Real Estate | Medium | Medium |
| Commodities (Gold) | Medium | High |
By diversifying, you reduce the risk of losing all your savings to inflation and increase your chances of earning returns that outpace inflation.
Certain assets tend to perform better during inflationary periods. Real estate, for example, often appreciates in value alongside inflation, making it a good investment. Commodities like gold are traditionally seen as safe havens during times of economic uncertainty. Similarly, investing in government bonds that offer inflation-linked returns can be another protective measure.
Automation is a powerful tool in personal finance. Setting up automatic transfers from your current account to a savings or investment account ensures that you save consistently, regardless of market conditions. This "set it and forget it" approach can help you stay disciplined and build your savings steadily, even when inflation is high.
One way to combat the effects of inflation is by increasing your income. Whether through side gigs, investments, or career advancements, earning more money can help you keep pace with rising costs. In the Nigerian context, exploring online freelancing, starting a small business, or investing in skill development can provide additional income streams.
Living below your means is crucial, especially during inflationary periods. This involves cutting unnecessary expenses, budgeting carefully, and prioritizing needs over wants. By doing so, you free up more money to save and invest, allowing you to build a financial cushion against inflation.
One of the biggest mistakes you can make during inflation is holding all your savings in cash. The value of cash diminishes as inflation rises, meaning the longer you hold onto it, the less purchasing power it has. Instead, consider putting your money into interest-bearing accounts, bonds, or other inflation-resistant assets.
2. Don’t Keep All Your Money in a Regular Savings Account
During periods of economic uncertainty, it’s natural to feel anxious about your finances. However, keeping all your money in a regular savings account might not be the best strategy. Regular savings accounts often offer lower interest rates, which may not keep up with inflation. Instead, consider exploring fixed deposits, which typically offer higher returns. By diversifying your savings and including fixed deposits, you can potentially earn more interest and better protect your wealth in the long run.
Let us look at an example:
For this example, we're using the FirmEdge Account by Firmus Microfinance Bank, which has an interest rate of 18 - 21%, and the Firmus Save Account which has a 10% interest rate.
Let's assume Mr Tayo saved ₦50,000 every month in the Firmus Save Account and compare it to if he saved ₦2,000,000, in the Firmus FirmEdge account for 1, 5, 10, and 15 years.
From the comparison above, it's clear that fixed deposits outperform traditional savings accounts over time. We can see that even with a monthly deposit of ₦50,000 in a savings account versus a one-time ₦2,000,000 deposit in a fixed deposit account, the growth potential of fixed deposits is significantly higher across various timeframes.
Let's look at a second example:
Jide is aiming to buy a house that costs ₦50,000,000. He has ₦30,000,000 and is aiming to save up to ₦50,000,000. in the next 10 years. Here are two possible outcomes depending on if he decides to save his money in a fixed deposit account or if he decides to save in a regular savings account.
Savings Account (10 years, 1.5% interest): Even with compounding over 10 years, Jide's money would grow to approximately ₦39,041,190.60.
Fixed Deposit (10 years, 6% interest): Locking in a fixed rate of 6% for 10 years guarantees a predictable growth. After 10 years, Jide's total amount would be around ₦57,434,992.13 (₦30,000,000 principal amount + compounded interest over 10 years).
These examples highlight the power of compounding interest and the advantage of locking in your funds at a favourable rate during inflation. For Nigerians looking to secure their financial future, a fixed deposit is a great opportunity to grow wealth steadily.
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It might be tempting to halt savings when inflation is high, especially if your budget is stretched thin. However, stopping savings can put you in a precarious position if unexpected expenses arise. Even if you can only save a small amount, consistency is key. Over time, these small contributions can add up and provide a buffer against economic challenges.
While it might be tempting to chase high returns during inflation, it’s essential to avoid overly risky investments. The volatility of assets like cryptocurrencies or speculative stocks can lead to significant losses, especially in an uncertain economy. Stick to a balanced approach that prioritizes stable, inflation-resistant investments.
Finally, one of the worst mistakes you can make is ignoring inflation altogether. Failing to adjust your savings strategy in response to inflation can result in the erosion of your wealth. Regularly review your savings plan, consider the current economic environment, and make informed decisions to protect your financial future.
Inflation is an inevitable part of the economic cycle, and its impact on savings cannot be overlooked. By following the do's and don'ts outlined in this article, you can better navigate inflationary periods and safeguard your financial well-being.
Remember to diversify your savings, invest in inflation-resistant assets, and automate your savings to stay disciplined. Avoid the pitfalls of holding too much cash, panicking, and stopping your savings altogether. With a proactive approach, you can weather the storm of inflation and emerge financially stronger.