Why saving alone is no longer enough – understanding inflation

Saving has been considered a solid virtue for generations. However, economic conditions have changed significantly: Inflation is slowly but steadily eating away at the hidden reserves in your account. Interest income is usually well below the rate of inflation, with the result that assets are shrinking in real terms. The inflation of money is not an abstract quantity, but a concrete loss of purchasing power. Those who rely solely on traditional forms of saving are ignoring this silent loss of value.

What is inflation?

Inflation describes a general increase in the price level in an economy. This reduces the purchasing power of money. It is also referred to as monetary devaluation. The average annual inflation rate in Germany over the last 10 years (2015-2024) was around 2.2%. This is an average value, although the actual rates varied from year to year and, according to LBBW (Landesbank Baden-Württemberg), ranged from 0.5% in 2020 to 6.9% in 2022. The years 2022 and 2023 had the highest inflation rates at 6.9% and 5.9% respectively, according to the Federal Statistical Office.

Why is saving not enough?

Traditional forms of saving, such as savings books or call money, hardly earn any interest and in the worst case scenario even result in a real loss. With an inflation target of two percent, 1,000 euros will only have a purchasing power of 672.97 euros in twenty years.

Even at 2% inflation, purchasing power is almost halved within 20 years. This clearly shows that inflation is eating away at even fixed-interest capital.

Consequences of the inflation of your money

When prices rise and capital does not generate sufficient interest, money gradually loses value. The effects affect even supposedly safe investments:

• The real return on traditional investments lags behind inflation.
• Even moderate inflation of 2% can reduce purchasing power in the longer term.
• In phases of high inflation, for example due to rising energy or food prices, the loss of purchasing power even increases.

So how can you invest your money safely?

In order to effectively counter monetary inflation, it is important to rely on a structured and broad-based investment strategy. The following approaches have proven their worth in practice:

1. Use diversification
   Distribution across different asset classes such as equities, real estate and inflation-linked bonds preserves assets in the event of monetary inflation
2. Inflation-linked bonds
   These adjust repayment and interest to the consumer price index – providing concrete protection against inflation
3. Shares and ETFs
   Broad investment funds(ETFs) can generate long-term returns above the inflation of your money and are considered a solid option for investing money safely.
4. Tangible assets such as real estate or gold
   Such investments are regarded as “safe havens” in inflationary phases; they are a robust means of countering the inflation of your money.

Investment – a sensible combination of different options

A well thought-out wealth strategy takes into account various investments and opportunities to build up capital that are coordinated with one another. There is no one perfect way, but rather the right mix of security, returns and flexibility. This is the only way to offset or even outperform the inflation of your money in the long term.

If you rely exclusively on savings, you have to accept that the purchasing power of your money will decrease year after year. An intelligent alternative is to invest your money safely – with a balanced portfolio that focuses on real assets, shares, inflation-linked bonds and liquidity reserves. This combination protects against inflation and also opens up opportunities for real appreciation.

How to protect your assets from inflation

The inflation of money reduces the long-term value of any sum of money that does not earn interest. It is therefore crucial not to rely on traditional savings behavior. So if you want to invest your money safely, you need a clear investment strategy that focuses equally on earnings opportunities and inflation protection.

Broadly diversified investment opportunities offer the necessary balance if they are combined sensibly. They cushion fluctuations and at the same time secure substance and returns. Maintaining purchasing power and financial security can no longer be taken for granted. But with the right knowledge and a clever investment concept, the value of your assets remains protected even in times of high inflation.

Contact the experts at FI Investments and arrange a non-binding initial consultation.

You can also download our white paper “The safest way to buy bonds successfully” and learn how to make financial decisions that suit your life.