Inflation. This is a time when inflation has become an everyday reality. We’re not just seeing prices for goods and services rise month by month, but sometimes even day by day.
This rapid increase has left many of us wondering how to navigate such a challenging financial landscape. Is it the right time to make major purchases, like a home or a car?
This article will explore various aspects to consider when facing inflation, providing practical advice for thoughtful and deliberate action.
Inflation, to Act or to Wait?
Navigating Financial Uncertainty.
The first and perhaps most crucial question that arises during a period of high inflation is whether to act immediately or to wait. On one hand, we all feel the purchasing power of our money shrinking and prices continuing to climb.
This can create a sense of urgency a desire to make long-desired purchases before they become completely unaffordable. This is what some call the “madness of reason” the rush to buy while you still can.
However, a closer look reveals a more complex picture. For many, the prospect of winter looms with the threat of exorbitant energy costs, which could lead to massive, unexpected expenses.
The current situation is both unclear and unpredictable. Markets are changing rapidly, and forecasts for the next six months vary wildly. This uncertainty suggests that hasty and ill-considered actions could lead to greater losses than gains.
Major Purchases in an Inflated Economy.
Let’s look at specific examples, such as buying a home or a car. Is now the right time to make such significant purchases?
Buying and Selling a Home.
It has been observed that some people are rushing to sell their large homes with gas heating.
The reason is clear: gas prices have become prohibitively expensive. However, before making such a decision, several factors must be considered:
Costs of Alternative Heating.
Gas, electricity, pellets, briquettes, firewood—everything used for heating is now at a premium. Currently, there is a noticeable shortage of wood and especially pellets across Europe, and wood prices are not expected to return to their former low levels.
The Benefit of Selling.
By selling your current home, you likely won’t gain much, as you will still have to buy a new one, perhaps with pellet heating. In fact, you might not gain financially at all and could even lower your social status and well-being.
Long-Term Perspective.
In my opinion, it would be a mistake to sell a property for a low price out of purely emotional fear. In the long run, such a rash decision could lead to losses, not gains.
Homeowners should not rush to sell their properties out of fear of an expensive winter and massive heating bills. Instead, it would be better to seek alternative solutions for heating to avoid such huge expenses. While some experts recommend this approach, it’s essential to be critical.
Is it the only solution?
Changing Your Heating System.
Many are also considering changing their heating systems to reduce costs. But the short answer is: don’t rush! Wait!
Investing a large amount of money in a new heating system right now might not be the right move. You have to realize that all homes will face high expenses, regardless of the heating type.
This applies both to the one you might sell and the new one you might buy. The situation could be completely different in the spring. The market and related inflation can change rapidly. The energy sector’s outlook could be entirely different in a few months.
Therefore, my recommendation is categorical: wait until spring and don’t rush into unnecessary action.
Conscious Financial Actions in an Era of Inflation.
While inflation can create financial stress, it’s also an opportunity to re-evaluate your habits and make deliberate decisions. Here are some suggestions:
1. Budgeting and Reducing Expenses.
• Create a Detailed Budget: A detailed budget that includes all income and expenses will help you better understand your financial situation and identify areas where you can cut costs.
• Prioritize Needs Over Wants: Differentiate between needs and wants. Focus on essential expenses like food, housing, and transportation, and consider opportunities to reduce spending on less critical items.
• Be Mindful of Daily Spending: Even small daily purchases can add up. Consider ways to save, such as cooking at home instead of eating out or reducing entertainment costs.
• Save Energy: Find ways to save energy at home. This could involve using more efficient lighting, unplugging devices when not in use, or lowering the thermostat.
2. Savings and Investments.
• Build an Emergency Fund: In times of inflation, it’s especially important to have a financial safety net for unexpected events. Aim to save at least 3-6 months’ worth of expenses.
• Invest to Outpace Inflation: While the value of cash is falling, there are investment opportunities that could protect your capital from inflation. Consider investing in real estate, stocks, or other assets that have historically maintained their value during inflationary periods. However, always consult with a financial expert and carefully evaluate the risks before investing.
• Consider Alternative Income Streams: Look for ways to increase your income. This could be a side job, freelance work, or learning new skills that can help you earn more.
3. Critical Thinking and Information Analysis.
• Avoid Panicking: During inflation, it’s easy to panic and make hurried decisions. It’s crucial to remain calm and make thoughtful choices based on rational analysis.
• Evaluate Information Sources: Be critical of your information sources and don’t succumb to rumors. Follow reliable economic analysts and financial experts, but always critically evaluate the information they provide.
• Consult Experts: If you feel uncertain about your financial future, consult a financial advisor. They can provide personalized advice that fits your specific situation and goals.
Where Is the Best Place to Keep Your Savings?
In this unpredictable era of inflation, a key question arises: where is the best place to keep your savings to protect them from losing value? Let’s look at different options and their pros and cons, as well as touch upon the topic of Bitcoin.
Where to Keep Savings During Inflation.
1. Savings at Home (Cash)
Pros:
• Accessibility: The money is easily accessible at any time.
• Control: You have complete control over your money.
Cons:
• Loss of Value: Cash loses its purchasing power due to inflation. The higher the inflation, the faster your money’s value decreases.
• Security Risks: Cash at home is not protected from theft, fire, floods, or other accidents.
• No Earnings: Money kept at home doesn’t earn any interest or other income.
Recommendation: Only a small amount of cash should be kept at home for a short-term emergency fund. Keeping larger savings at home is not recommended due to inflation and security risks.
2. Savings in a Bank.
Banks offer several ways to store savings:
a) Savings Account Pros:
• Convenience and Security: A savings account is a safe way to store an emergency fund. Deposits up to €100,000 are guaranteed by the Deposit Guarantee Fund.
• Accessibility: The money is usually easily accessible, although there might be withdrawal restrictions with certain types of savings accounts.
• Small Interest: Some banks offer small annual interest rates on money held in a savings account.
Cons:
• Low Return: Interest rates on savings accounts are usually very low and rarely keep pace with inflation. This means your money’s purchasing power will decrease.
• Impact of Inflation: Inflation “eats away” at your savings if they are simply held in a standard account.
b) Term Deposit Pros:
• Fixed Interest: The bank pays a fixed interest rate for keeping your money for a set period. The longer the term, the higher the interest.
• Predictability: You know what your profit will be at the end of the term.
• Security: Deposits up to €100,000 are guaranteed.
Cons:
• Limited Accessibility: The money is not available immediately, and breaking the agreement early may incur penalties.
• Inflation Risk: If inflation exceeds the term deposit’s interest rate, your money’s purchasing power decreases.
• Not Suitable for an Emergency Fund: This option is suitable if you already have an emergency fund and are looking for a secure way to store larger sums.
Recommendation. A bank is a good solution for an emergency fund and short-term savings, but for the long term, you should look for more active investment options to protect your money from inflation.
3. Precious Metals (Gold, Silver).
Precious metals, especially gold, are often considered a “safe haven” during inflation and economic uncertainty.
Pros:
• Value Preservation: Gold has historically been able to preserve its value during inflation. It acts as a natural “hedge” against it.
• Physical Asset: You own a real physical asset that is not dependent on the banking system or government stability.
• Diversification: Precious metals can help diversify your investment portfolio and reduce risks.
Cons:
• No Income: Gold and other precious metals do not provide interest income.
• Storage Costs and Risks: Storing physical gold at home is risky, and storing it in a bank vault or specialized facility incurs additional costs.
• Price Volatility: Although stable in the long term, the price of gold can fluctuate in the short term.
• Acquisition and Selling Costs: When buying and selling precious metals, you have to account for broker commissions and markups.
Recommendation. Precious metals can be a good part of an investment portfolio, especially in inflationary conditions, but they shouldn’t form the basis of all your savings. Consider investing a small portion of your savings in gold or silver to diversify your risks.
4. Bitcoin (Cryptocurrencies).
Bitcoin is a digital currency that is becoming increasingly popular, and some consider it an inflation hedge.
Pros:
• Decentralization: Bitcoin is not subject to the control of central banks or governments, which means it cannot be “printed” in excess, thus potentially protecting against inflation.
• Limited Supply: Bitcoin has a limited supply (only 21 million will ever be created), which can theoretically help preserve its value.
• Potential for High Returns: The price of Bitcoin has experienced rapid increases, which could lead to significant profits.
Cons:
• High Volatility: The price of Bitcoin is extremely volatile, and its value can change drastically in a short period. This means there’s a possibility of both large profits and large losses.
• Regulatory Uncertainty: The regulation of cryptocurrencies worldwide is still unclear and could affect their value.
• Security Risks: Cryptocurrencies are vulnerable to cyberattacks, hacking, and platform security risks. You must be careful to store your private keys securely.
• Electricity Consumption: Bitcoin “mining” consumes an enormous amount of electricity, which draws criticism from environmental advocates.
• Not a Widespread Means of Payment: Although this is gradually changing, Bitcoin is still not widely accepted as a means of payment.
Recommendation if You Are Considering Bitcoin:
• Review the Risks: Before investing in Bitcoin, carefully research all the associated risks. The crypto market is highly unpredictable.
• Only Invest What You Can Afford to Lose: Given the high volatility, only invest a sum of money that you are prepared to lose.
• Do Your Research: Study Bitcoin’s technology (blockchain), its operation, and market dynamics.
• Diversify: Don’t put all your money into Bitcoin. Diversify your investment portfolio to include other assets.
• Use Reputable Platforms: If you decide to invest, use secure and reliable cryptocurrency exchanges or platforms.
General Tips for Managing Savings During Inflation.
• Diversification is Key: Don’t put all your eggs in one basket. Spread your savings across different asset types to reduce risks and maximize potential returns.
• Investments That Protect Against Inflation:
◦ Real Estate: Historically, real estate is a good inflation “hedge” because rent and property values tend to increase with inflation. However, it requires a large investment and is less liquid.
◦ Stocks: The stocks of specific companies, especially those that produce goods or provide services that are essential even in inflationary conditions, can be a good investment. However, the stock market is risky and volatile.
◦ Commodities: Investing in raw materials like oil, gas, or metals can yield profits during inflation because their prices usually rise.
◦ Inflation-Linked Bonds: Some countries offer bonds with interest rates linked to the inflation rate, thereby protecting the investment from a loss of value. In Latvia, there are State Treasury savings bonds available.
• Consult a Financial Expert: Before making any significant financial decisions, especially about investments, consult a qualified financial advisor. They can help you choose the best solutions for your needs and risk tolerance.
• Continuously Educate Yourself: Stay up-to-date with economic news and educate yourself about financial markets to make informed decisions.
• Avoid Unnecessary Debt: In times of inflation, it’s important to reduce the amount of debt you have, especially those with variable interest rates.
Remember, there is no one-size-fits-all answer. Every situation is unique, and the best way to handle your savings during inflation depends on your individual financial goals, risk tolerance, and current circumstances.
Patience and Deliberation.
Inflation is a complex economic phenomenon that requires a conscious approach. Rushing and acting without thinking can lead to greater losses than gains.
Therefore, during this period, it is important to observe, wait, and carefully evaluate every decision. Budgeting, reducing expenses, and critical thinking are the main tools that will help you overcome the difficulties created by inflation.
Remember that spring can bring a new perspective and change the current market situation. So, don’t rush into major purchases or drastic changes unless it’s absolutely necessary.
Patience and a deliberate approach are your best allies in this era of inflation.
Have a Great Day!
