If you have a job, you will probably receive your salary every month. Many people choose to put part of their money in a savings account. Wise, because you always have a buffer when you need money in the future. This certainty can give you more peace of mind, and that is worth a lot.
In recent years, more and more people have found out that the above method of saving money is actually not as wise as it seems. Money in a bank account is depreciating in value. The stuff that you can buy today with 1000 dollars, you may be able to buy with at least 1500 dollars in 20 years.
What is inflation and how it works #
Inflation is the name for money that is decreasing in value. That is why some also speak of ‘money depreciation’. We can buy less and less with the same money. What you could buy today for 10 dollars will be a lot more expensive in 10 years due to inflation. Inflation therefore leads to a decrease in purchasing power.
When inflation occurs, we see that the prices of goods become more expensive, while revenues barely increase. There can be various causes for the price increases of goods.
In addition to an increase in prices, the excessive printing of new money can also be a cause of inflation. In America, the Federal Reserve Board (FED) determines how much money comes into circulation. When they decide to print more money, the value of the dollar falls. In that case, there is more supply of the dollar, while demand does not necessarily have to increase.
The FED may have several reasons for printing extra money. Usually, they want to stimulate the economy with this, because when more money is in circulation, the more money companies and consumers can spend.
How to protect you your money against inflation #
The money you earn today may not be fully spent in the future if you leave it in a savings account. This is because it is depreciating in value, while there are plenty of ways to protect it against inflation. Below you can read the 4 most important ways to protect your wealth against inflation and to preserve your purchasing power.
1. Cryptocurrencies like Bitcoin (BTC) #
One of the most modern ways to protect money against inflation is cryptocurrency. Despite the fact that this investment form is becoming increasingly popular, it also takes the greatest risk compared to the other methods in this list.
When we look at the historical prices of cryptocurrencies, we see that they have risen over the long term. Therefore, cryptocurrencies like Bitcoin (BTC) could be a good hedge against inflation. The condition is that the price of the crypto currency that you own rises.
The high volatility of crypto means that you take a greater risk when you invest your money in this digital currency. The advantage is that you have the option of large returns, which may not be feasible with other investment forms. Therefore, make sure that you do good research into the crypto currency you want to invest in, and never invest money that you cannot afford to lose.
Are you looking for more stability? Then an investment in precious metals such as gold, silver or platinum could suit you.
2. Investing in precious metals #
The most popular hedge against inflation are precious metals, such as gold, silver and platinum. Investing in precious metals is seen by many people as a stable and safe method of asset protection, although there is always a risk that the value of a precious metal will fall. Still, when we look at the historical prices of precious metals, we see that the value has increased over the long term.
In times of economic uncertainty, many people turn to precious metals. There is only a limited stock of precious metals available, and new precious metals will never arise again. Supply is stagnating, while demand is only increasing. This makes precious metals a very popular investment vehicle.
Precious metals are used for jewelry, but of course also for electronic devices. And we need more and more of that. The demand for precious metals is therefore unlikely to decrease much in that regard, according to experts. This makes precious metals a perfect means against inflation.
3. Investing in real estate #
Real estate is a popular means of combating inflation. If you want to protect your money against a decrease in value, you will have to move it to a product that does not decrease in value. Real estate is one such product that has increased in value over the long term.
In most cases, real estate prices rise in line with inflation. Real estate investors often rent out their real estate to private individuals. The leases are linked to the inflation rate, so that income from real estate remains equal to inflation. Should inflation rise by 6%, so will property rental income.
4. Stocks #
Stocks have been a popular investment vehicle for many years. Multimillionaire Warren Buffett, among others, has become incredibly rich by investing in stocks. Stocks are an excellent means of protecting against inflation. This is because corporate profits rise in line with inflation.
When a company’s profits rise, the dividend paid to the stakeholder can also rise. In addition, the value of the stock is often determined in part by the profits that companies make.
However, it is important to point out that it is often not that easy. For example, it is important that you buy the stocks at the right time. If you buy the stock at a high price, there is a chance that the price will fall in the future and you will make a loss. In addition, it is never a certainty that the prices of stocks will rise in times of high inflation.
High inflation can cause a lot of uncertainty in the financial market. Consumers pay more attention to the spending they make, which means they may spend less on companies within certain sectors. This can actually cause the profits of some companies to fall.
Investors therefore do a fair amount of research into the stocks in which they may want to invest. For example, it looks at how the company has performed during inflation/economic crises in the past, and how they compare themselves to competitors.
Our money is worth less due to inflation. That happens every year, because inflation is of all times. However, inflation can be higher in one year than in the next, so the rate of depreciation can vary from year to year. Fortunately, there are several ways to protect your money from inflation.
This gives you the opportunity to invest in crypto, which entails many opportunities but also risks. Precious metals are the most widely used inflation hedge that people have relied on for years. Investing in real estate can be lucrative, but comes with a lot of costs. You also have the option to opt for stocks, which, along with precious metals, are seen as the most traditional form of investment.