What to Do Now to Prepare for Inflation in Europe
2022-10-31
The threat of inflation could be lurking around the corner. While the United States has been relatively immune to the effects of inflation, this could change if the European Central Bank continues to increase interest rates. In the past year, the European Central Bank has raised its benchmark rate three times, with two more increases expected in 2019.
Should the ECB continue to raise rates, it would likely lead to an increase in inflation. And should inflation rise, it could have disastrous effects on your finances. Fortunately, there are ways to prepare for inflation in Europe. Keep reading to learn what to do now to prepare for inflation in Europe.
Keep your savings and investments safe
A sure sign of inflation is a drop in the purchasing power of money. The average American lost an average of 3.1% of his or her buying power due to inflation from 1907 to 1913, and another 2% from 1919 to 1922. If we were to experience similar levels of inflation in today’s economy, a $1,000 investment in 1913 would be worth a little more than $290 today and a $1,000 investment in 2019 would be worth less than $256.
So as interest rates increase, it’s essential that you keep your savings and investments safe. If your savings account is paying 0.5%, you’d be wise to put your money in a safer deposit account paying at least 1%. And if you’re investing in the stock market, it’s essential that you hedge some of your risk by investing in funds and stocks that hedge against inflation.
Diversification is key
As mentioned before, one of the best ways to protect your money against inflation is by diversifying your investments. The best way to diversify is to invest in several different areas. This way, if one investment goes south, at least a few will remain stable.
Investments that tend to hold their value no matter what the inflation rate include government bonds and treasury bills. Also, investments that don’t increase in price include real estate, gold, and silver.
Diversification of investments
As part of your investment diversification, spread your money among several different investment funds and stocks. This way, even if one investment goes south, another will likely fare better.
You can diversify your investments in a couple different ways. You can either invest via an investment fund or by purchasing several different stocks. An investment fund is just like an investment portfolio; however, an investment fund holds a variety of different assets, such as stocks, bonds, real estate, and commodities.
Maintain emergency funds
One of the most important things you can do to prepare for inflation in Europe is to maintain a cash cushion. This way, even if prices rise significantly, you won’t be completely locked out of the market due to high fees.
Maintaining an emergency fund should be at the top of everyone’s financial priority list. What’s an emergency fund? It’s money set aside specifically for unexpected things. And what’s considered an unexpected expense? Borrowing money, investing in assets that lose value, and getting medical procedures that cost more than normal are all things that should be considered emergencies. Thus, an emergency fund is money set aside specifically for these types of expenses.
Cut back on unnecessary spending
As a final step to preparing for inflation in Europe, it’s essential that you cut back on unnecessary spending. This will help keep inflation at bay, as well as make sure that you have enough money left over each month to cover all of your expenses.
The best way to reduce unnecessary spending is by creating a budget and sticking to it. A budget is essential in helping you stay on track with your spending, as well as identify places where you can make cuts.
Reduce your debt burden
One of the best things you can do to prepare for inflation in Europe is to reduce your debt burden. This will help you avoid becoming financially hostage to creditors, as well as give you more money in your savings account.
How do you reduce your debt burden? The first step is to identify all of your current creditors and take note of what debts you have with each. Then, prioritize your debts in order of importance. Once you’ve completed this process, you can start working on reducing your debt.
Bottom line
Inflation is a very real danger in Europe, and something that everyone should be aware of. Fortunately, there are ways to prepare for inflation in Europe. Keep your savings and investments safe by keeping your money in a safe account that pays at least 1% interest.
Next, diversify your investments to reduce your risk of losing a significant portion of your savings due to a single investment going south.
Finally, reduce your debt burden and keep unnecessary spending in check by creating a budget that outlines what is and isn’t considered an emergency.
