How do I protect myself from value of my money depleting over time?

What is time value of money and how do I protect myself from value of my money depleting over time?

Considering the dynamics of today’s world when uncertainty is most certain, preserving savings and generating earnings on these savings at a minimal risk is the most important financial goal for individuals. Time value of money is one of the core principles of finance. The value of a sum of money is more today, compared to a sum of money that is received in future.

Let us take, for example, a sum of Dh1,000 that is held in cash for a year. The value of this amount does not increase during the year if held in cash. Instead, if this amount is deposited in the bank as fixed deposit, interest earned over a period of one year would be added to the principal amount, taking the total amount to a figure, higher than Dh1,000.

Inflation has a direct impact in reducing value of money. Goods that you buy today are not available at the same price a year later. Pricing is generally higher, given the rising inflation. In a nutshell, money should generate money, in excess of the inflation rate, to preserve the value of money that you have saved. To protect your corpus from the risk of higher interest rates and inflation, you need to gradually invest these funds available and annual earnings generated from investments should ideally exceed rate of inflation.

Apart from fixed deposits with banks, several investment options are available in equities, bonds, mutual funds, precious metals and so on. You may choose these options depending upon the risk appetite. You may also need to check the interest rate on fixed deposits being offered in your home country and consider placing some amount as fixed deposit depending upon your preference.

Please understand and evaluate investment options at your end and choose them wisely knowing that equity investment carries more risk compared to other options. Ideally, you may spread the investment corpus in two to three options and start investing funds gradually with the aim of holding these investments for a longer tenure to capitalise on the gains, that may eventually exceed inflation. Do not forget to review your investments from time to time and rebalance your portfolio if required.

I am still in the early age of my career. How to I raise my savings corpus?

We suggest that you implement the concept of Learning, Earning, Saving, Spending, abbreviated as LESS, in your day-to-day life. While you continue to allocate funds for upgrading your skills that enhance your earning potential, please keep a tab on your spending and continue to build up your savings.

Try and restrict your monthly expenses and discretionary spend to a certain percentage of your net monthly salary or income and maintain this range, while increasing allocation to savings gradually. Over time, you will be able to accumulate your savings.

At any given point in time, you may retain funds to the extent of at least four to six months of your monthly recurring expenses as emergency fund, that you can draw from the bank at any given point in time. Funds available after setting aside emergency corpus can be invested gradually depending upon your risk appetite and your future requirement. Remember, markets may continue to stay volatile, given the global uncertainties. Historical performance may not be a guarantee to future returns. However, in the long run, the markets generally tend to move up depending upon the global factors prevalent from time to time.

The writer is founder and CEO of ZTI Global

• Business