What should I do with the savings I have in the bank? How can I protect my savings from inflation?
This question is a good one and, furthermore, it is not as easy to answer as it seems. The first thing we have to be clear about is that leaving our savings in the bank at the mercy of inflation is not an option. Or, at least, not a good one, because we have already seen that inflation is like a termite that stealthily eats up our past, present and future savings.
For sample, what better the constant and sound data. According to INE data, the growth of the Consumer Price Index in the last 20 years has been 44.6%. In other words, to have 1,000 euros today, you would have to have saved the equivalent of 1,446 euros in 2001. The 446 you are missing have been eaten by inflation.
With this in mind, the goal of every saver should be protect from inflation those savings that we are not going to need in the next two years.
A few years ago, this did not have much of a mystery, it was enough to put them in a deposit or in a rigged savings account and, for somewhat longer terms, there were guaranteed return savings products that could divinely solve the ballot for us.
The problem is that all these products are tied to the interest rate which, as you may have noticed – for good – on your mortgages, has been at its minimum for more than five years. The least friendly face of this mortgage bargain is that as long as mortgages remain cheap, savings products are not going to give even for pipes.
When inflation was low, this was not so much of a problem, but, Now that she’s out on a rampage again and the guys are still lagging behind, us savers of the bunch are in a bind.
As long as interest rates remain so low, savings products are not going to help us protect our savings from inflation. In this unflattering context, we have two options:
The first is buy a house. I’m sure you weren’t expecting it, but yes, buying a house, especially with a mortgage, is a fairly effective way of protecting yourself against inflation. Historically, housing has always held up well, and house prices have tended to rise at least as much as inflation.
In this sense, if we buy a house for 100,000 euros, Although inflation rises, the normal thing is that the price of your house rises with it (this is not guaranteed, but on average, it is usually the case) and that the savings you invested in your home, at least, maintain its purchasing power, which is what it is about.
But that’s not the thing because, If you have bought the house with a mortgage and you have, for example, 70,000 euros left to pay, this debt is proportionally less due to the work and grace of inflation. Imagine, for example, that inflation was, like this year, 5%. Well, as is normal, the house does revalue that 5% but the total debt remains the same, you would have a house of 105,000 euros with a debt that instead of being 70% of the value, now it would only represent the 67%. Each year that passes, this difference will increase.
In addition, if the mortgage is of a variable rate, it is very likely that, if inflation rises, the rates will end up rising as well and the installment will increase, but, if on top of that you have a fixed-rate mortgage, Even if inflation and rates rise, your fee will remain the same, so, in real terms, your mortgage payment is getting smaller.
For this reason, in times like the current one, when inflation tends to rise, A fixed-rate mortgage protects you doubly against inflation. And, on the contrary, in times when inflation tends to lower a mortgage with a variable rate, it would allow you to benefit from a potential drop in rates.
Beyond leaving us the rooms in bricks, as long as the types remain so low, the other option we have to protect our savings from inflation is to invest them, assuming a little risk, as we will see in subsequent topics. There is no other.
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