5 To Do's Against High Inflation
With inflation in the EU & Germany being at record highs, you might wonder what you can do to protect your hard-earned money. Our 5 To Do's against inflation will help you.
Table of contents
Our European Central Bank aims at an annual inflation of 2% over the medium term. October 2021 showed an inflation of 4%, 5% inflation in December 2021, 6% inflation in February 2022, and a record-high 10,7% inflation in October 2022. The highest recorded inflation in Germany in about 40 years.
10,7% inflation means that prices increased from October 2021 to October 2022 by 10,7%. And that means that your hard-earned money lost 10,7% value year over year all while your savings at Euro bank accounts are still returning almost a 0% interest rate. That’s no good! 😱
Our 5 To Do’s will help you to protect your money and even show you ways how you can profit from high inflation while most people lose during high inflationary times like these. We ranked our inflation To Do’s by the impact on your personal inflation rate – from the least impact to the highest impact.
Inflation To Do #1: Adjust Your Consumption
Before trying to do anything against inflation, first, we need to understand that official inflation is measured by an exemplary basket of an average consumer. The average German inflation basket that led to 10,7% in October 2022 can be seen here on the website of the Federal Statistical Office of Germany.
As it is very unlikely that your personal spending habits are the exact same as the official inflation basket (20% on cold rent, 13% on mobility) the German Federal Statistical Office also provides a personal inflation calculator. We tested the personal inflation calculator and measured inflation of 5,8% instead of 10,7%.
5,8% personal inflation is a lot better than 10,7% official inflation but still very high. With a 5,8% inflation rate, 100€ of your hard-earned money will be worth only 94€ in real value after just 1 year, 75€ real value after 5 years, and 57€ of real value if 5,8% inflation continues for 10 years.
In order to decrease your personal inflation rate, you have to adjust your consumption and buy fewer goods & services with high inflation (like oil, gas, and diesel) and more goods & services with low inflation (like software, clothes, and fruits). If that will not work any wonders on your personal inflation rate, let us take a look at 4 other things you can do to protect your hard-earned money.
Inflation To Do #2: Gold & Silver
If you would like to do something against high inflation, we first of all need to understand why we even have such high inflation in Germany or in the EU. After understanding the why you will see that there is only one solution against inflation and that is to buy real assets that we mention in our inflation To Do’s.
Arguably the biggest reason for the record inflation is that central banks around the world have been printing a lot of money. As of writing this article the European Central Bank is printing 40 billion € every single month with their asset purchase programs to support the European economy.
Similar to the European Central Bank, the US-American central bank Federal Reserve, as well as the Bank of Japan, have been printing money over the last +10 years and continue to do so. The charts below show the balance sheets of the European Central Bank (ECB) and the Federal Reserve (Fed).
Both central banks have been printing money since the global financial crisis in 2008 – especially in the last 2 years since the start of the COVID-19 pandemic. The Federal Reserve and the European Central Bank basically doubled their balance sheets from 4-5 trillion Euro or USD to about 10 trillion in assets.
If central banks around the world doubled their balance sheets, it means that they created twice as many Euros or USD as there were 2 years ago. Every second Euro or USD that exists on this planet is 2 years or younger. Are you still wondering why we are experiencing record inflation right now? 🤔
The solution is to change your money that can be printed at will by central banks to real assets that cannot be created on a central bank computer. As precious metals like gold or silver have to be mind out of the ground both should rise in value by at least inflation (at least in theory).
The issue with gold and silver from a strategic investment perspective is that precious metals are just laying around with you hoping for an increase in value. While you are doing that, precious metals do nothing except shine pretty. Other inflation To Do’s might even provide some passive income.
Inflation To Do #3: Cryptocurrencies
The perfect example of a cryptocurrency that cannot be printed or created more of is bitcoin with its hard cap of 21 million bitcoin. No central bank in the world has the power to create more bitcoins. If you are interested to buy bitcoin you can do that with one of the largest crypto providers in the world crypto.com.
The real value behind cryptocurrencies is the blockchain technology that is leveraging a shared database among a computer network. This groundbreaking technology enables new usage in form of a store of value or in terms of accessibility of certain investments like the real estate security tokens from GermanReal.Estate that allows investors to invest in rental properties in Germany for just 1€.
As in the previous inflation To Do precious metals like gold & silver, cryptocurrencies are also not providing any form of passive income like the following inflation To Do’s – and that is why they are at the end of the list because they can have the highest impact on your personal inflation rate.
Inflation To Do #4: Stocks & Bonds
This inflation To Do introduces us to productive assets that have the ability to generate profits and a cash flow while you hold that asset. With unproductive assets (like in the previous inflation To Do’s) you are banking on a price increase in order to make a return. Productive assets can offer a second type of return in terms of passive income.
Multiple possibilities for a return on your capital are important because an increase in value of an asset by 10,7% year over year leaves you realistically at a 0% return factoring in a 10,7% inflation rate. If you have to pay capital gains tax on your 10,7% return, you are actually losing money even though you have a nominal return of 10,7% per year.
Stocks, mutual funds, or ETFs with stocks inside can offer passive income in the form of dividends that companies pay as a result of their successful business activities. Depending on the ETF or mutual fund that you have these dividends are either paid out to you (distributing) or reinvested (accumulating).
As central banks around the world might start raising interest rates again, bonds will be a very interesting investment in the near future. Historically speaking, a 1% change in interest rates will result in a 7% change in bond prices with a negative correlation. So if interest rates go up, bond prices go down, and vice versa.
Inflation To Do #5: Real Estate
Inflation is a negative effect on everyone with assets and a tremendously positive effect on everyone with debt. If 10,7% inflation will devalue your money by 10,7% year over year, 10,7% inflation will also devalue your debts by 10,7% year over year. So the key to winning in high inflationary times is to get into debt.
Not getting into consumer loans or other loans that you will buy liabilities with, rather take a loan and invest your money into real assets with leverage (e.g. buying an investment property with a mortgage from a bank). Because leverage turns good deals into great deals!
The Postbank Wohnatlas 2021 study shows that real estate prices in Germany rose on average by 9,6% in 2020 after inflation and are expected to rise even more in the future. Factoring in that most people buy properties with a bank mortgage that comes at a cheap interest rate, your return on investment will be a lot higher than 9,6% (you can calculate your return with Lendlord yourself).
And the best of all is that Germany is not enforcing any tax on value increases of real estate. If you are selling your property after the speculation period of a maximum of 10 years you are enjoying the full value increase completely free of tax.