You will produce a table showing the nominal and real return on each place you keep cash.
You now know that a balance can grow while what it buys shrinks. Knowing it in general does not tell you which of your own accounts it is happening to, or by how much. This exercise puts a number on every place you keep cash, using the money map you built in lesson 1.4, Map where your money sits and what protects it.
It takes about 20 minutes in Excel or Google Sheets. The worked example uses Jun Hao from lesson 1.4 again, and all his figures, including the inflation rate, are made up for the example.
Start a sheet with one row per account. In column A put the account name, and in column B the yearly rate you actually earn on it.
"Actually" is the hard part. For a bonus interest account, check whether you met the conditions in the last few months, as you saw in lesson 1.2, How a bank earns the interest it pays you. If you credited your salary but did not hit the card spend, you earn the lower rate. If the bonus applies only to the first slice of your balance, work out the blended rate on your whole balance. For an e-wallet that pays nothing, the rate is zero. For a fixed deposit, use the rate it is earning now, and note when it matures.
Next, in column C put the inflation rate. Use the most recent full-year figure from the Department of Statistics on SingStat, or the figure MAS reports, and write the source and year in a note at the top of the sheet. Use the same figure for every row, so the comparison is fair. If you worked out in lesson 4.3, Your personal inflation rate is not the headline number, that your own costs are rising faster, you can add a second column with your own estimate.
In column D, the real return, use the exact formula from lesson 4.2, Real return is roughly the nominal return minus inflation. If the first account is in row 2, type =(1+B2)/(1+C2)-1 and fill it down. Format column D as a percentage with two decimal places.
Then mark every row where the real return is below zero. Conditional formatting that turns negative cells red does this automatically, or you can add a column E with =IF(D2<0,"Losing","Keeping up").
The last column turns the percentages into something you can picture. For each account, work out what S$10,000 left there for five years would buy, measured at today's prices.
In column F type =10000*(1+B2)^5/(1+C2)^5. The top half grows the S$10,000 at the account's rate for five years. Dividing by (1 plus inflation) to the power of 5 converts that future sum back into what it would buy today. This assumes both rates stay where they are for five years, which they will not, so treat the result as an illustration of the gap, not a forecast.
Jun Hao uses 2.5% as his inflation figure. His savings account earns 0.05%. His bonus account earns 1.6%, because his salary is credited each month. His fixed deposit earns 2.8%. His e-wallet earns nothing.
For the savings account, 1.0005 divided by 1.025, minus 1, gives a real return of about minus 2.39%. S$10,000 left there for five years becomes about S$10,025, which buys what about S$8,861 buys today.
For the bonus account, 1.016 divided by 1.025, minus 1, gives about minus 0.88%. S$10,000 becomes about S$10,826 in five years, worth about S$9,569 at today's prices.
For the fixed deposit, 1.028 divided by 1.025, minus 1, gives about plus 0.29%. S$10,000 becomes about S$11,481, worth about S$10,147 today, provided he can renew at a similar rate.
For the e-wallet, the real return is about minus 2.44%. S$10,000 sitting there would still read S$10,000 in five years and buy what about S$8,839 buys now.
Three of his four rows are flagged. Only the fixed deposit keeps ahead of inflation, and only just. His US dollar account from lesson 1.4 is left out, because its return also depends on the exchange rate, which this exercise does not try to cover.
A finished table has every Singapore dollar account from your money map, the rate you really earn, one inflation figure with its source, the exact real return, a flag on every negative row and a five-year figure at today's prices. Nothing in it tells you to move money. It shows you what each balance is doing, which is what you need before deciding anything. Once the last row is filled in, read down the flagged lines and look at how much money sits in each.
Complete the real return table for your accounts and write one sentence on which balances are losing purchasing power.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).