- Personal Finance»
- Banks, S&L's, Credit Unions
How to Protect Your Savings against Inflation
The most common impact of inflation on your savings is the reduced purchasing power, for example if you have $10,000 in savings in a bank account paying 2% interest a year and if the inflation rate is 3% a year you will have 1% or $100 eroded from your savings in terms of purchasing power.
Inflation in general terms is the increase in price of a basket of goods measured through the increase (or decrease) of value in the consumer price index (CPI). This basket of good consists of items which are used frequently and includes clothing, food and even automobiles.
One of the ways in which you can protect your savings from being eroded by inflation is by investing where the rate of return on the investment is higher than the rate of inflation.
The most common method of investment used by working professionals is by investing in bonds issued by the government. However the rate of profit on these bonds is usually quite low, for example the National Bonds in the UAE paid 1.15% profit on investment last year, a higher (sometimes guaranteed) return is also available but investment has to be “locked” for a fixed term. For example the UAE national bonds guarantee 4% annual return on your investment with a lock-up period of minimum 3 years. Current inflation rate in UAE is 4.4%, this means that even by investing in national bonds your savings are not protected against inflation.
Another option for investment is in publically traded stocks of companies. However there is a minimum amount needed to open an account with a stockbroker and whenever a stock is purchased there is fixed amount or a percentage paid to the broker as commission. Secondly the market is volatile and unless you risk large amount of your savings there will never be enough returns to compensate for the risk, stocks value falling by 25% in a week is not unimaginable.
Real estate is between these two investment types, it is not as safe as a bond or as risky as a stock. However it gives a higher return on investment than a bond and with more certainty than a stock. One drawback for real estate investment is the fact that it is capital intensive; you will need atleast $100k to buy the most inexpensive studio apartment in Dubai.
Crowdfunding in real estate therefore is the most reasonable instrument which you can use to protect your savings against inflation; it does not require a lot of investment and gives the same return which is given by real estate asset. It is also less risky since it is backed by a ready physical asset and by participating with the crowd you lower your risk and are able to diversity. Average rental yield in Dubai is 6.5%.
Therefore by investing in crowd funding you don’t only protect your savings against inflation but also increase them year-on-year.