When the value of the general economy decreases, a large amount of paper money depreciates and inflation occurs, which raises market prices to compensate for depreciated paper money. Unfortunately, Bulgaria often occupies the top positions in the European rankings for high inflation.
Rising food prices have led to a record rise in inflation since the beginning of the pandemic. Fears are that higher fuel and electricity prices could lead to further increases in basic food prices in the autumn and winter.
Financial incentives along with COVID-19 may also cause rapid inflation, which we will feel later in the future. Therefore, if you have savings, it is good to think now about what to invest them in so that they are not “eaten” by inflation.
Personal financial budget – revenue and expenditure planning
The profitability of bank deposits is long gone and they are no longer a solution to our savings. The alternative is one – to invest in assets other than cash to protect our savings with the potential to increase them.
How to protect your money from inflation
You can choose protection through “real” assets. While looking for inflation-proof investments, keep in mind that no investment is completely immune to inflation. They provide you with some protection, but not 100%.
Some things have inherent value. No matter how weak or strong the currency you use for payment, the base value remains relatively constant. Such assets are real estate and precious metals.
Some paper assets also protect against inflation, although they do so through more artificial means, such as the Ministry of Finance adjusting the value of inflation-protected securities.
Purchase of real estate
People need a roof over their heads and will pay rent, whatever it is. Properties that are bought for rent offer stability – monthly passive income and tax benefits, but mostly protection against inflation. As a rental property owner, you can increase your rent each year to keep up with market prices, which usually exceed inflation. In fact, rent is proving to be one of the most important drivers of inflation. This makes rental property a major investment in the fight against inflation.
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If you do not yet have your own home, buying one will protect you from devaluing your savings. Homeowners with fixed-rate mortgages are protected from inflation, at least for the cost of housing. Even more – inflation helps them by reducing the value of monthly mortgage payments. Historically, real estate prices have outpaced inflation almost every year, with an average annual rate of between 4% and 5%. In addition, you have almost complete control over this asset, and in the event of a drastic devaluation of the local currency, you can sell it in another, more stable one.
Real estate investment through the stock markets
There is another opportunity for real estate investment, which may also have its advantages over the physical purchase of the real estate. This is an investment in real estate through the stock markets. You can make a similar type of investment in real estate by buying: shares of real estate companies; exchange-traded funds (ETFs) investing in real estate; real estate investment trusts (REITs); crowdfunding of real estate.
Gold has always been respected around the world for its rarity, value, and rich history. Compared to paper currency, coins, or other types of assets, gold has retained its value over the years and people use it as a way to pass on their wealth from one generation to the next.
Investing in gold is often used to protect against inflation. As the value of the currency declines, people begin to lose confidence in it and look for other ways to preserve their capital, with gold being one of the first on the list. In addition, the precious metal rose in price due to geopolitical or economic uncertainty, low-interest rates, and a weak US dollar. This makes gold an asylum asset that is highly sought after in global uncertainty.
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The main opportunities to invest in gold are investment gold (physical purchase); gold futures; contracts for difference (CFD) of gold; shares of gold mining companies; exchange-traded funds (ETFs) investing in gold.
TIPS (Treasury Inflation-Protected Securities)
Physical or “real” assets are not the only way to protect ourselves from devaluing our savings. The US government issues special instruments that are indexed to inflation in the US and are essentially bonds. But unlike them, the principal changes to reflect rising consumer prices, while profitability remains fixed.
TIPS are issued for a period of 5, 10, or 30 years and are low-risk assets, respectively profitability. Since the direct purchase of these instruments by Bulgarians is almost impossible, they can be acquired through exchange-traded funds on a European exchange. Despite the positive aspects of this type of bond, they have one major drawback – in negative inflation (deflation), the principal is reduced and becomes below par. With TIPS you will not get rich, but at least you will save your savings in a period of rising prices.