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What is Inflation?

Aktualisiert: 24. Aug. 2023



Inflation is a term often mentioned in the news. Maybe you've heard that prices for things like food or clothing are going up. Inflation simply means that the money you have is losing its purchasing power. For you, this means that you can buy less with the same amount of money than you could before.


But how does inflation come about?

One of the main causes of inflation is an increase in the money supply. When there's too much money circulating, but not enough goods and services, prices rise. This is because there's more demand for these goods and services than can be supplied. As a result, the price is artificially driven up. This can happen when central banks print money to buy government bonds or when they lower interest rates to stimulate the economy. Inflation can affect our daily lives as our savings become less valuable. For instance, if you spent 100 Euros on your daily necessities a few years ago, you might have to spend more than 100 Euros today for the same amount of items. This can be very frustrating, especially if you're saving for something and it ends up being more expensive than you expected. However, if you invest money in assets like stocks or real estate, it can help you escape inflation. This is because the value of these assets typically rises with inflation, compensating for your loss in purchasing power.


Why is it so important to be aware of inflation?

It's vital to watch inflation as it can have significant negative impacts on your finances over the long term. For instance, if you're saving for retirement, you have to consider that the money you're saving today will be worth less in the future. So, you need to adjust your savings goals to ensure you have enough to cover your future expenses.


Inflation is similar to the compound interest effect, only inflation works against you!


A 2% decrease in purchasing power per year might not sound too bad at first, but what happens to your money if it sits idle for years? Let's say you've saved up 20,000 Euros and kept it as an emergency fund under your pillow. Five years later, you want to go on a world tour as you've always wished. Sadly, your 20,000 Euros are now worth approximately 18,114 Euros, and you've lost almost 10% in purchasing power. The longer the timeframe, the worse the effect; after 10 years, your money's only worth 16,407 Euros, and after 35 years, you've lost a whole 50% of your purchasing power. This assumes inflation remains constant at 2% and doesn't significantly increase; otherwise, it would be even worse.


In conclusion, inflation is a crucial factor you should keep an eye on. It's essential to understand how inflation arises and how it impacts your purchasing power. Moreover, it's vital to know how to invest your money to escape inflation and protect your wealth. Without a concrete plan and disciplined execution, you'll forever be stuck in the rat race of consumption, debt, and loss of purchasing power.


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