Inflation: The Silent Enemy Which Takes Money Away From You

December 3, 2019

"Why investing is so important?

Can't I just leave my money on my bank account and enjoy them when I am going on holiday?"

Although this is an option, it doesn't consider that the money left in your bank account is losing value every year, because of inflation.

Inflation is a concept that is not familiar for a lot of people, especially the ones who don't have a background in Economics.

Here is a definition which we can use to start.

Inflation is the rate at which the general level of prices for goods and services is rising

(kudos to Investopedia for being the best investing definition platform ever).

So, if you buy some bread for 2 Euros, and the yearly inflation is 2%, in one year you can expect the bread to cost 2 Euros +2*0.02 = 2.04 Euro

(Side note: I am well aware that inflation is not so simple and not every product's price is raising as much as the inflation, but let's keep this easy definition for now)

So, because of the inflation you will actually end up 2% poorer every year if you don't invest your money.

Not investing your money is an investing choice, usually a losing one.

Let me put it into a better perspective.

Because of the inflation the prices will go up, while your money will stay the same.

So 100.000 Euro today will have a purchase power of 98.000 Euro one year from now.

Now it doesn't look like a small amount anymore, right?

Inflation sucks! Wouldn't it be nice if prices are dropping every year?”

This situation can happen as well, and it's called deflation.

The central banks from all over the world are trying to avoid this situation, because It's very bad for entrepreneurs and companies.

If a product can be less expensive tomorrow than today, people will wait until the last moment before buying it.

And the companies will have to pay a lot of costs in inventory and to get rid of unsold products.

They will get less profits and they will need to lay off people.

Which means less customers in the future and a negative spiral that is hard to stop.

Inflation is a necessary evil we need to cope with to keep our economy going.

If you want to be protected against it, you need to invest in financial products that gives you a higher return than the inflation rate.

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