Over the course of the last 12 months or so, there has been an increasing amount of discussion on the possibility of inflation taking off or rising significantly from where it is today.
Perhaps the most significant voice of all has been that of Christine Lagarde, President of the European Central Bank (ECB). After all, a central role of the ECB is to manage inflation and so when Ms. Lagarde indicated that the ECB would be likely to take a more relaxed approach to containing inflation, it really meant a lot.
What is inflation?
Inflation is the rise in the value of goods and services. Currently, across the Eurozone, the target rate of inflation is about 2% per year. In other words, the ECB views inflation of about 2% as being indicative of a healthy economy.
How inflation impacts the value of your money
Inflation will reduce the value of your money over time. In other words, for each €100 you own today, if inflation is say, 2% per year, in 12 months time, the real buying power of that €100 reduces to €98. This will continue year after year in line with the prevailing rate of inflation. Over time, the purchasing power of that €100 continues to fall. So, in real terms, inflation acts like a corrosive on the value of your money, which is why it is important to take action to protect it.
How to protect the value of your money
A proven method of protecting the value of your money is by earning a rate of return on it. While in the past, it was possible to place money on deposit within a savings account and earn a rate of return, today, this is no longer the case. This is primarily due to the policy of the ECB. Instead, one must consider another option; investing.
What is investing?
Investing is defined as the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit. Investing earmarks money for the future, hoping that it will grow over time. Investing, however, also comes with the risk for losses. This is the critical consideration, risk!
How to manage risk
The process of managing investment risk is called diversification. This is where money is invested in a broad range of options including company shares, property, commodities, bonds and even cash. So, to diversify, one of the more established methods is by investing in managed funds and Exchange Traded Funds (ETF’s). This is where lots of bits of different companies, bonds and so forth are used to invest and in doing so, reduce the overall amount of investment risk for the investor.
At the end of the day, the trick to maintaining the value of your money is to balance the rate of investment return that is greater than the rate of inflation but diversify sufficiently to reduce the risk of loss for the investor. After all, it’s your money, protect its value!
A final note of caution, always consult with a qualified financial adviser before making investment decisions.
Over the course of the last 12 months or so, there has been an increasing amount of discussion on the possibility of inflation taking off or rising significantly from where it is today.
Perhaps the most significant voice of all has been that of Christine Lagarde, President of the European Central Bank (ECB). After all, a central role of the ECB is to manage inflation and so when Ms. Lagarde indicated that the ECB would be likely to take a more relaxed approach to containing inflation, it really meant a lot.
What is inflation?
Inflation is the rise in the value of goods and services. Currently, across the Eurozone, the target rate of inflation is about 2% per year. In other words, the ECB views inflation of about 2% as being indicative of a healthy economy.
How inflation impacts the value of your money
Inflation will reduce the value of your money over time. In other words, for each €100 you own today, if inflation is say, 2% per year, in 12 months time, the real buying power of that €100 reduces to €98. This will continue year after year in line with the prevailing rate of inflation. Over time, the purchasing power of that €100 continues to fall. So, in real terms, inflation acts like a corrosive on the value of your money, which is why it is important to take action to protect it.
How to protect the value of your money
A proven method of protecting the value of your money is by earning a rate of return on it. While in the past, it was possible to place money on deposit within a savings account and earn a rate of return, today, this is no longer the case. This is primarily due to the policy of the ECB. Instead, one must consider another option; investing.
What is investing?
Investing is defined as the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit. Investing earmarks money for the future, hoping that it will grow over time. Investing, however, also comes with the risk for losses. This is the critical consideration, risk!
How to manage risk
The process of managing investment risk is called diversification. This is where money is invested in a broad range of options including company shares, property, commodities, bonds and even cash. So, to diversify, one of the more established methods is by investing in managed funds and Exchange Traded Funds (ETF’s). This is where lots of bits of different companies, bonds and so forth are used to invest and in doing so, reduce the overall amount of investment risk for the investor.
At the end of the day, the trick to maintaining the value of your money is to balance the rate of investment return that is greater than the rate of inflation but diversify sufficiently to reduce the risk of loss for the investor. After all, it’s your money, protect its value!
A final note of caution, always consult with a qualified financial adviser before making investment decisions.