Inflation devalues your money over time, which dramatically reduces its purchasing power. This is a financial risk you can’t afford to ignore.
It’s been a decade of decline for interest rates
You have probably noticed those changes on your savings accounts. There is simply no interest to be found. The current (Jan 2020) interest rate for European consumers is 0.02% and for banks looking to borrow from the European Central Bank, the interest rate is at -0.04%. This effectively means that you can no longer rely on your bank to grow your savings.
So what do you do with your savings? Most of us will likely do nothing about it, because the alternatives seem complicated. We just leave it sitting in our bank account, where it seems safe. As far as our experience goes, the number on the account doesn’t change unless we spend that money. Deposit €500 in 2020, and you expect to see that €500 there in 2030.
But that isn’t quite true. Your money is losing value everyday, it just doesn’t show up on your account balance. This loss of value is called “inflation”, and it hits you at around 2% per year in Europe and most other developed economies.
So what? 2% per year is tiny. Why worry? It’s true, in the very short-term, it’s not a big deal, but believe me it adds up quickly. If you keep your savings account for 14 years, it’s already lost a quarter of its value. Think of it as a little thief stealing your money without you noticing.
It’s already difficult keeping up those saving habits. Saying no to trips, or going out with friends, or enjoying your favorite latte. The whole point of saying ‘no’ was delayed gratification. Save today, so we can have more tomorrow. But thanks to inflation this reward will never come. It’s like trying to fill up a bathtub without a plug.
Since the 70s you need 6x the amount of money to buy just one goddamn coffee!
Low interest rates are here to stay
You might think that the lack of interest rate is just a temporary measure that will soon be reversed, but this is simply not true. European debt-levels do not allow for an increase in interest rates. Hardly any renowned economist believes that we will see higher interest rates any time soon. There is even talk of the “new normality” of low interest rates.
On top of this, Harvard economist Paul Schmelzing recently published a historical analysis of interest rate levels. He comes to the conclusion that the interest rate levels fluctuate in the short term, but have, on average, been falling for 700 years (!).
The takeaway is that we have to be prepared for interest rates to remain low — and invest our savings accordingly.
So how can you protect yourself from the inflation monster?
You have several options, but the fastest, cheapest and most flexible option is to invest in the market. Here’s how that can work:
Invest globally and invest in different kinds of assets, such as stocks (owning shares in businesses), bonds (lend to governments and business), real estate etc. And in order to keep your investments stable, invest predominantly in bonds, as they’re generally less likely to change in value — as well as give you a small interest.
I’ll attach this guide for you to do it yourself. And I think it’s empowering to learn about investing. But we have done all this work for you and with us you can start whenever you are ready (but don’t wait too long, remember inflation ;)!)
Sadly, there are no guides featuring only sustainable investments (so look for ESG/SRI screened alternatives). And bear in mind, your savings account or cash account at the bank are also not sustainable! So even more of a reason to shift towards sustainable investments as an alternative.
We took care of all of that, a fully flexible, relatively stable portfolio to love for the long-term. We would love you to be the first to try our first portfolio, and to be there as we grow our investment and finance solutions without compromising on sustainability.
We are a start-up and would love you to join our exiting beginnings! So, if you want to become a beta-tester for the product as well as learn about sustainable investing, join our community at our Facebook group — Sagefund Closed Beta.
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