Rising Inflation: Where Should You Keep, Invest Your Money?

In the April World Economic Outlook (WEO) report published last week, the International Monetary Fund (IMF) projected that Kenya’s inflation rate would average 7.2% across 2022. Currently, the year-on-year inflation stands at 5.6%, which means it’s likely to get higher in the coming months.

If you ask most people, they’ll tell you that inflation is bad for the country. But what exactly is inflation, and what makes it bad? More importantly, have you ever considered the impact of inflation on your savings and investments?

Below, I will answer these questions and share some ways you can safeguard your money from inflation. Let’s get right into it!

What Is Inflation?

Inflation refers to the erosion of a currency’s purchasing power over time. Inflation is often reflected by a broad increase in the average cost of goods and services in a country within a given period.

For instance, basic commodities like maize flour, eggs, milk, bread, cooking oil, fuel, and cooking gas cost more today than they did a year ago. This is a sign of inflation since you can buy less today with the same amount of money as you could last year.

How Inflation Affects Your Savings and Investments

When you save or invest your money, the last thing you want is to lose any of that money. However, this is exactly what inflation does – it reduces the value of your savings and investments over time.

Let’s say, for instance, you have Ksh5 million sitting in a fixed deposit account paying 2% annual interest with a 5-year term. You intend to use the money to purchase a house that currently costs Ksh5 million.

At the end of the 5 years, your money will have grown to about Ksh5.5 million. However, with an annual inflation rate of 5%, the house will be worth about Ksh6.3 million. This means you’ll need an extra Ksh800,000 to purchase the same house. In other words, your savings will have shrunk by Ksh800,000 over 5 years due to inflation.

How to Safeguard Your Savings and Investments from Inflation

Now that we’ve seen how inflation shrinks your savings and investments, is there anything you can do to protect your money from inflation?

The only way to protect your savings and investments from inflation is to pick a savings or investment avenue with a rate of return that is higher than the annual rate of inflation.

For instance, if you buy a government bond with an annual yield of 10% while the annual inflation rate is 7%, your money won’t lose its purchasing power. However, if you keep the money in a savings account with a 2% annual interest, your savings will inevitably lose their value over time due to inflation.

With this in mind, let’s look at some of the places you can save or invest your money, and their annual rates of return.

Current Accounts

This is the regular bank account that you use to facilitate day-to-day transactions. Keeping your money in a current account is a great idea if you want your money to be highly liquid. 

However, the downside is that most current accounts don’t pay any interest on your money. For this reason, keeping your money in a current account is not a good idea if you want to protect your money from inflation.

Read Also: Should You Keep Your Savings in A Current Account?

Savings Accounts

Savings accounts make it easier for you to save since they limit the number of times you can withdraw money from the account. They also pay interest on funds held in the account. In Kenya, savings accounts pay interest rates ranging from as low as 1% to as high as 7%.

With annual inflation for 2022 projected at 7.2%, this means you’ll not protect your money from inflation by keeping it in a savings account. It is, however, possible to negotiate for a higher interest rate especially if you choose this next option - fixed deposits. 

Read Also: All You Need to Know About Savings Accounts in Kenya - GUIDE

Fixed Deposit Accounts

Fixed deposit accounts in Kenya pay interest rates ranging from as low as 1.35% to as high as 9.5%. The rates are negotiable if you’re fixing high amounts of money.

It is possible to safeguard your money from inflation by keeping it in a fixed deposit account, but you have to negotiate for higher rates than the annual inflation rate.

Read Also: Where Do I Keep My Savings? Fixed Deposit Account

Money Market Funds, Mutual Funds, and Unit Trusts

These are an excellent way to invest your money with minimal risks and earn decent returns on your investment. The interest rates for money market funds, unit trusts, and mutual funds in Kenya in Kenya range between 4% and 10%. They can be a great way to safeguard your money from inflation if you get interest rates above 7.5%, at least based on the projected annual inflation for 2022.

Read Also: Where Do I Keep My Savings? Money Market Fund

Treasury Bills and Bonds

Treasury bills and bonds are one of the best ways of protecting your money from inflation. Treasury bills pay interest rates ranging from 7.3% to 9.8%, depending on the tenure, while interest rates for bonds fall between 10% and 14%. 

Investing in treasury bonds and bills makes it very unlikely that you’ll lose your money to inflation at the projected inflation rate.

Read Also: Is Investing in Government Bonds a Good Idea? (Pros & Cons)

Retirement Accounts

While retirement accounts are a great way to protect yourself from poverty in old age, most retirement accounts in Kenya pay minimum annual interest rates of about 4% to 6%. Therefore, if your goal is to protect your money from inflation, a traditional retirement account may not be the best option given the projected inflation rates. 

However, note that you will be saving for a prolonged period of time (decades) for your retirement, which means you may need to engage the services of a financial adviser to figure out what retirement savings plan guarantees your savings are not shrunk by inflation. 

Read Also: Planning for Retirement: Key Factors to Consider

Stocks

Investing in stocks is a great way to grow your money and protect it from inflation, with the Kenyan stock market delivering a 12% average annual return. However, you have to be careful when choosing the stocks to invest in. Otherwise, you could end up losing your money.

Saccos

In 2021, interest on deposits offered by top Saccos in Kenya ranged from 6% to 13%. As such, Saccos can be a great way to protect your money from inflation, provided you join a Sacco offering higher interest rates.

You can even earn higher interest rates if you choose to buy Sacco shares instead of depositing savings. In the 2021 financial year, most Saccos offered double digit dividends on share capital with some offering returns slightly higher than 20%. 

The main challenge with using your savings to purchase Sacco shares is that you would have to find another member to transfer the shares to in the event you wanted to withdraw your money. 

Read Also: Windfall As Sacco Members Reap Big in 2021 Dividends

Land

Kenyans love investing in land, usually for speculation purposes, but can this be a way to protect your money from inflation?

The annual appreciation rate for land in Kenya ranges from as low as 1% to as high as 40%, depending on the location. 

However, the appreciation rate in most places falls below the 7.2% annual inflation rate. As such, there is no guarantee that you will beat inflation by using your savings to buy land unless you buy land in a location with exceptional demand.

If indeed, land is your preferred option, it is very possible to generate good returns against inflation if you conduct extensive research on future rates of appreciation - depending on how long you want to hold on to your investment.

Read Also: How to Safely Buy and Transfer Land in Kenya

Foreign Currency Accounts

If you are lucky enough to get paid in dollars, pounds, and other strong currencies, keeping your money in a foreign currency account instead of converting it to Kenya Shillings can be a way to hedge against inflation of the shilling.

For instance, if the Kenyan shilling depreciates 8% against the dollar within a year, while the annual inflation rate is 7%, keeping your money in a dollar account can protect you against inflation.

However, while there is some degree of protection against inflation, a 2021 analysis by the Peterson Institute for International Economics found that saving in national currencies in countries that have inflation targeting such as Kenya yielded “roughly the same or even better returns than investments in US dollars. 

WRAPPING UP

A high inflation rate not only makes things more expensive for you, but can also eat up your savings and investments. Fortunately, you can safeguard your savings and investments from inflation through investment channels that have a higher rate of return than the annual inflation rate.

Examples of investment vehicles that are great for hedging against inflation include treasury bills, bonds, and stocks. You can also protect your money from inflation by putting it into fixed deposit accounts, mutual funds, and money market funds that offer high rates of return