Inflation - Silent Rouge in your Wallet
What inflation is?
Today is the twenty-eighth day of January, so I want to touch on the topic of inflation.
28.01 is not international inflation day, but in my opinion, every day is the best day to speak talk about finance or money. So lets go! ;-)
Inflation is an economic process which results in a decrease of the purchasing power of money. Inflation is connected with growth of a prizes.
Inflation is an important factor – not only for economists but also for “regular” citizens of the conscious world.
To quote stats, a safe level of inflation in Eastern Europe is somewhere about 5%
Let me explain one fact: statistics are statistics and market reality is market reality. Median inflation during the Bessa Market can be bigger by a few percentage points.
I can appraise that inflation in Eastern Europe (author is Polish but inflation level in UK, USA and Poland is similar – at least at present) is somewhere around 7%.
What does this mean?
For every $100 you save, $7 are lost over the course of a year due to inflation. Physically you will still have 100 $ The problem is that at that point, 100 $ will be worth 93 $ of last year's dollars.
Inflation robs us of our money
Inflation robs us of our money. Decreased worth of money causes an increase in the level of prices and fares.
Let me say a black joke about the inflation paradox: money is losing its worth, so there is more expensive petrol. Distributors of petrol want to set a constant level of income, so they must increase the nominal worth of petrol – by raising prices. Appreciating prices of petrol cause an appreciation of prices of petrol transport, which leads to further appreciation in prices of petrol.
Petrol appreciates becauses... its transportation costs appreciate.
How much can we lose during a few decades?
Let's do some Case Study: some man has 1000 $, which is “invested” in unpercented count. How are wealth of this money during next years?
Table prepared for 7% Inflation.
100 $ after three decades is worth a dozen or so dollars! What is the conclusion?
There is a need to defend our assets against inflation.
But how? By procurement assets, which gives us bigger return of investment (ROI) than inflation level.
By the way, I want to warn every one, that a car is not an investment because it EATS your money – not produce it.
Bank deposit are not a perfect method of defence against inflation. Capital markets can be good shields against inflation. But there is another problem: using financial instruments capital markets requires practice, wisdom, and knowledge.
Investment Funds have this advantage, that inflation increases their profits. But there are some pros and cons of an IF strategy.
Another possibility is estates. The requires some skills of estate’s market reality (who said that it will be easy?) but it is some of easier form of investment. The big advantage of estates is that they can establish two sources of income: passive and residual. Of course you can sell it for profit.
What kind of conclusion can we make?
The most dangerous thief is the one who leaves no trace.
Start to protect your money from inflation. If you have some cash, know all possible information about protecting it from inflation or think about a house in the countryside.
Remember that the choice is yours. I'm not responsible for your investment decisions so remember: you are the boss and you are responsible for what you do with your money.