Why Inflation Matters When Choosing Where to Put Your Money
Why Inflation Matters
When Choosing Where to Put Your Money
A Simple Guide for Everyone
What Is Inflation?
Inflation is when prices go up over time. Think about it this way: if a loaf of bread costs KSh 60 today, inflation means that same loaf might cost KSh 65 or KSh 70 next year. Your money buys less than it used to.
Imagine you have KSh 1,000 hidden under your mattress. If inflation is 8% this year, that KSh 1,000 will only buy what KSh 920 could buy before. You did not spend anything, but your money lost value just by sitting there.
A Simple Example: The Unga Test
Last year: A 2kg packet of unga cost KSh 120
This year: The same packet costs KSh 135
What happened? Prices went up by about 12.5%. That is inflation at work.
The lesson: If your savings only earned 5% interest, you actually lost money in real terms because prices rose faster than your earnings.
Why Should You Care About Inflation?
When you save or invest money, you want it to grow. But if inflation is eating away at your money faster than it is growing, you are actually getting poorer without realizing it.
The golden rule is simple: Your money must grow faster than inflation. Otherwise, you are losing money.
Understanding "Real Return"
The "real return" is what you actually earn after subtracting inflation. It is the true picture of whether your money is growing or shrinking.
| What Your Investment Earns | Inflation Rate | Your Real Return (What You Actually Get) |
|---|---|---|
| 5% | 8% | -3% (You are losing money!) |
| 8% | 8% | 0% (Just breaking even) |
| 12% | 8% | +4% (You are actually growing!) |
| 15% | 8% | +7% (Strong real growth!) |
How to Choose the Right Place for Your Money
Different savings and investment options (we call them "instruments") give you different returns. Here is how to think about them when inflation is high:
Money market funds invest in T-Bills and bank deposits — read what is a money market fund in Kenya?
Compare live MMF rates on Serrari and T-Bill yields to see where your money outpaces inflation.
When Inflation Is High (above 7%)
- Look for investments that pay more than the inflation rate. Government bonds, Treasury bills, and infrastructure bonds often do this.
- Avoid leaving too much money in a regular savings account. Most savings accounts in Kenya pay 2-4% interest, which is far below inflation. Your money shrinks every day it sits there.
- Consider assets that rise with prices, like property or certain stocks. When prices go up, the value of a house or a good business usually goes up too.
- Infrastructure bonds are tax-free in Kenya, which means you keep more of what you earn. This makes them especially powerful when inflation is high.
Watch how the Central Bank responds — read why you should watch the Central Bank Rate.
When Inflation Is Low (below 5%)
- You have more options because most investments will beat inflation.
- Even safer, lower-return options like Treasury bills or money market funds can give you a real profit.
- This is a good time to lock in long-term bonds at decent rates before rates drop further.
Your Simple Inflation Checklist
Before you put your money anywhere, ask yourself these questions:
- 1What is the current inflation rate? (Check the Kenya National Bureau of Statistics or the news.)
- 2What return does this investment promise me?
- 3Is the return higher than inflation? If yes, my money will grow. If no, I am losing money.
- 4Are there any taxes on the return? After paying tax, is my return still above inflation?
- 5How long will my money be locked in? Could inflation change a lot during that time?
KEY TAKEAWAY
Inflation is like a silent tax on your savings. Always compare what your money earns against the inflation rate. If your return does not beat inflation, your money is actually losing value every single day.
For how exchange rate movements compound inflation risk, read why forex movement matters.
Speak to a Serrari advisor to inflation-proof your investment portfolio.
