There’s one way you can combat inflation: earning interest on your savings. With this in mind, it’s best to aim for compound interest over simple interest.
Compound interest is calculated based on the sum of your initial investment plus the interest you’ve already earned. For example, a sum of P100,000 with a compound interest rate of 5% will earn P5,000 on the first year. On the second year, you’ll earn interest on the total amount of P105,000 (original amount + first-year interest), which means you’ll get P5,250 instead of P5,000, bringing your total to P110,250 at the end of the year.
To explain just how powerful compound interest can be over a long period of time, let’s look at a sample scenario. If you start with a lump sum of P100,000 and leave it in a savings account that earns 5% annual compound interest for 18 years, your initial deposit will have grown to a total of P240,661. If you were to leave it to grow for even longer—say, 40 years— your initial deposit will have grown to an impressive P703,998.87 instead. So the sooner you start saving, the better.