Wednesday, October 1, 2008

Inflation vs BLR

In my Personal Finance make simple, there are only 2 big numbers :  Inflation and BLR.

Inflation tells you how much more expensive your daily routine cost is going to get.  Or how much your money will worth less in future.

BLR or Base Lending Rate is used by bank as reference how much they should charge you when they lend you money.
Both Inflation and BLR were created in Free Market, and therefore perfectly suitable for the Free Market - a trading ground that has Total Freedom.
However, Total Freedom also welcome frauds and scams.  Hence, in order to protect 95% of the population, controls have to come in.  Since then, Inflation and BLR have become more complicated.

Forget about what the goverment say, 
What is YOUR OWN Inflation ?

1. List down all your "daily routine" items and their costs
2. Determine what quantity / amount of each item is consumpt over a fix period of time
3. Sum up the total cost for that period

That would be your Living Cost !

After you have done the above for sometime, you can compare your living cost.  For example, last year was $1000 per month and this year is $1100/month, then your inflation rate this year compare to last year is 10%.  ( It doesn't have to be exact but if you do the exercise above, you will have a pretty good idea )

And this is the Real and Only Inflation Rate that you care about, 
not any other numbers experts tell you.

I don't borrow money from Bank,
Why should I care about BLR ?

First of all, all personal finance money goes to bank.  It doesn't matter if you buy insurance or mutual fund or stocks, you pay to a bank !  You may write a seller's account number but you still "pay to" the bank.  And Bank has ALL our money.  

Bank takes your money and lend it to others.  Bank promises you an interest rate and the Lender promises bank a higher rate.  The difference between the interest rates is what Bank earns.  Bank uses BLR to govern the lending rate to the money borrower.

So BLR can be used as an indicator to how well economy is doing ( again, actually much more complicated than this, but bear with me first ).  Actually the effect could be reverse, raising or lowering BLR can affect economy growth.

BLR Trends

Rules Of Thumb

1.  Your "Saving" should earns more than your inflation.
2.  Your "Income" should grow as much as BLR if not higher.

footnote : This post is written by a layman for the layman friends.  Hence quite a lot of terms used here may cause discomfort to many economists.  Don't curse and shout yet, just stick around a bit longer.  Eventually things will get clearer