Prevent inflation from reducing the value of your savings

Whether it’s the weekly shop, your energy bills or holidays, everything is becoming noticeably more expensive. Inflation is the general increase in prices expressed as a percentage. Suppose you have a shopping basket containing items that represent an average person's spending and it cost 100 euros to fill it last year. If you are paying 102 euros for the exact same basket this year, it means the rate of inflation is 2%. In other words, you need 2% more money to make exactly the same purchases. That explains why money you don't spend right away, such as savings, depreciates in value.

Your money falls in value when prices rise simply because the same amount of money buys you less than before. In other words, it’s detrimental to your purchasing power. Here’s another example to illustrate this:

• Suppose you have 10 000 euros in your savings account
• Saving for a year at an interest rate of say 0.5% earns you 50 euros in interest
• If prices go up by about 4% over the same period, the amount you’ve set aside is now worth 400 euros less in terms of purchasing power
• The outcome: 10 000 euros plus 50 euros in interest = 10 050 euros, but less 400 euros, i.e. your 10 050 euros is only worth 9 650 euros in purchasing power

Combining saving with investing gives you an opportunity to get more out of your money. Just like saving every month, you can also invest a (small) amount on a monthly basis. Investing involves risks and costs, but when you look at things from a long-term perspective, you spread those risks.

To sum up, consider your savings as a safe reserve and your investment as an opportunity to generate a higher return and help you stay one step ahead of the effects of inflation. Check out the opportunities to start investing.