Would you be shocked if I told you that, in 2050, a 6-pack of beer would cost almost R500 and your medical aid bill would set you back by at least R12,000 per month? Well, then you need to read on…
Throughout your financial journey, you’ve likely heard others tell you that it’s important to be financially aware. Maybe this pertains to the fee structure of your unit trust investment. Or understanding what companies your asset managers are putting faith in for future monetary growth. But one concept often makes a much sneakier and costly appearance: inflation.
What is inflation, exactly? Well, the technical definition is a steady increase in consumer prices coupled with a decrease in the purchasing power of your money.
In simpler terms, what that means is that the R10 you had last month is worth a little less today, even if only by a small amount. But don’t be deceived – those small decreases in purchasing power translate to a huge impact on the future value of your money. And it can make retirement planning a little more complicated and frightening.
In an attempt to describe the impact of inflation, I’ve sourced inflation figures for South Africa and the US and extrapolated the impact to the year 2050. What exactly will bread cost in 31 years time? And what about healthcare? You may be shocked. Let’s tuck in.
According to Trading Economics, the average inflation for food has settled at around 6.29% over the last 10 years (between 2009 and 2019). Of course, as you can see by the graph below, it’s a bumpy ride to get to that average, with years that were high and years that were low.
For the sake of simplicity, I’m going to work with the average for this exercise. Let’s say that you’d like to buy a loaf of brown bread from Pick ‘n Pay. That will set you back R11.99 today. In the year 2050, it’ll cost you a whopping R79,45 (a 562% increase based on today’s price).
What about other food items that make a regular appearance in your shopping cart? Take a look at what these would cost in the year 2050 (you might want to sit down for this):
A whopping R3742,54 grocery bill for only 12 things on your shopping list?? It may sound ludicrous now, but it’s likely going to be a reality in 30 years’ time.
What about the US? Well, they have a slightly lower inflation rate compared to South Africa – at an average of 3.39% per year over a much longer time period (1914 to 2019). Prices for similar items would look like this in 2050:
Your grocery bill would show an increase of above 35%.
The situation is a lot worse when considering healthcare inflation, which (in South Africa) rises at an average of CPI+3%. Essentially what that means is that medical costs will rise by 3% above general consumer inflation. For South Africans, that could equal up to a 9% increase each year. Let’s take a look at what your Discovery Health insurance premium would be in 2050, based on which option you’ve selected:
Anyone weeping yet? The lowest monthly premium goes from R839 to over R12,000 per month!
How to Make Budgetary Adjustments
While seeing the future cost of food and healthcare can reveal some pretty scary numbers, there is one thing I’m neglecting to mention. As food and healthcare prices rise, I’m assuming your employer is increasing your annual salary in line with your national inflation. If not, I implore you to please find a new job!
By way of example, if you were earning an annual salary of R400,000 in 2019, it would (or should) equate to a salary of over R1.8 million in 2050. This assumes that your boss is a nice person and provides an annual increase of around 5% per year. When you consider earning R1.8 million per year (or R150,000 gross per month), the R3,000 grocery bill I showed earlier doesn’t sound too bad, does it?
But I want to encourage you to not let that stop you from making changes to your spending and saving habits. Why?
As I’ve shown, prices don’t necessarily increase in line with inflation. They’ll often increase well above inflation. The perfect example is healthcare costs which generally increase by 3% above inflation in South Africa.
As your salary increases each year, you can’t let the amount you save stay the same. This slowly erodes your savings rate. For example, what used to be a savings rate of 20% in 2019 ends up being 0.04% in 2050 if you keep the amount you save the same.
So, what should you do?
My advice would be to do the following:
As your salary increases, increase the amount of money you save by 3-5% above general inflation. This will account for those sneaky costs that increase well above inflation.
Consider whether you’re getting the best deal – whether that pertains to food or healthcare. Shop around and see whether there are more affordable options without compromising quality. I recently requested a review of my motorcycle insurance and my premium dropped by over 40% per month.
Ensure that you’re being treated fairly at work. Don’t settle for a job that hasn’t increased your salary in line with inflation for the past 5 years. Essentially what that means is that your salary has decreased year-on-year.
And, lastly (but most importantly), place your savings into an investment vehicle that can earn you a return that beats inflation. Let your money work for you. For my South African readers, my advice is to stash your savings into low-cost ETFs via Easy Equities (who make it SO simple to invest).