A scarecrow named inflation. How to protect your investments from it?

Are you a fan of savings accounts? We certainly don't have good news for you. Today we will talk about why you should be interested in the inflation rate, how it affects your investments and why it is no longer worth saving in an account the way we used to.

When talking about inflation, you might think of a boring college lecture. Not surprisingly, its definition is the increase in the general price level of goods and services in an economy over a certain period of time. Not to mention a lesson, but an important thing for your investment. Quite simply, this means that with 3% inflation, you will pay CZK 103 for a thing worth CZK 100 next year, and CZK 106 the following year. The prices of goods and services increase unobtrusively, and money loses its original value. A few crowns a year, that's no drama. But what if you consider an investment of millions and inflation suddenly makes a difference to you in the tens to hundreds of thousands of crowns? This is what you need to take into account when planning investments.
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A little bit of that theory

In the Czech Republic, inflation is measured by the Czech Statistical Office. It examines how prices of different groups of goods and services change over time. Price increase equals inflation, and when prices decrease, it is deflation -- the opposite of inflation. According to the Czech National Bank, the average inflation rate in 2021 was 3.8%, and the CNB predicts 13.1% for the whole year 2022. This year's abnormally high inflation rate is due to events in the world, including the war in Ukraine. It assumes its early calming and return to normal values. In 2023, inflation is set to fall to 4.1%.
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Inflation, wages and investing

Inflation affects the value of money, but also the wages, interest rates and standard of living of most of us. In order to establish a balance, it is necessary that wages have risen accordingly as prices have risen. Preferably at the same pace. If only prices rose, our standard of living would decrease. For the same paycheck, we could buy less and less stuff. The inflation rate is taken care of by the national banks, which operate with interest rates.

It's pretty clear that changing the value of money will somehow interfere with the lives of investors. Let's show this with examples of investing in apartments.
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Example 1: I want to buy an apartment and later sell it profitably

Are you planning to buy an investment apartment and sell it in a few years? It's important to remember that it's not just about profit and its taxation, but that inflation is also part of the equation. Let's try to explain it to example. If you bought an apartment this year for 1,000,000 CZK, in a year you might sell it for 1,100,000 CZK. Housing prices are still rising. But how do you look at the earnings of CZK 100,000 per year that you received from the sale of an apartment when the inflation rate is 3-4%? Money loses value by up to 4%, plus you have to tax your earnings. Do not forget to take inflation into account in your calculations of return on investment.
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Example 2: I want to finance the purchase of an apartment with a mortgage

There are still a lot of people who have a negative attitude to credit, and those who “owe” look through their fingers. Do you know that it is sometimes more profitable to take out a mortgage than to save for years to buy an apartment? Savings in the account are subject to inflation, annually losing several percent of their value. Real estate prices are growing by 10-15 percent every year. And when you borrow money on a mortgage with interest less than current inflation, you really get cheap money.

For example, if someone took out a 7-year mortgage in December 2020, they won the jackpot due to this year's high inflation. When the rate of inflation is higher than the interest rate, the value of loans decreases. Lenders are losing and borrowers are gaining.
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Example 3: I want to build a property in real estate for a long time

Great idea! Tangible goods are not affected by inflation. If you have an apartment, house or land, its value will continue to grow along with inflation. Even if the real estate price growth itself stops, inflation will still be in play, which continuously raises the prices of goods and services. Cash or money in the account will lose value. That's why it pays to have money invested and not have a lot of it in cash or in an account, no matter how strange it sounds and maybe even unimaginable to some.
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Example 4: I want to save in an account and later buy a property from the saved money

Savings accounts no longer protect money against inflation. If, even with standard inflation of 3-4 per cent, you save in your account with interest of less than 4%, your savings lose value every day. For example, if you want to save on a basic 10-20% mortgage and are deciding which financial product to choose for saving money, look for ones that offer at least 4% appreciation. This is the only way to protect the value of the money saved. The Investown platform offers 7% or more. The basic mantra is that your savings must always cover the inflation rate and ideally still earn a little.
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Where to keep up to date information on inflation developments?

The inflation rate is worth watching every month. This will allow you to better plan whether this or that investment will pay off, or which position you will no longer hold because it stops paying off. Czech Statistical Office publishes information on the current inflation rate every month. Czech National Bank then on its site it predicts future developments. If you're also interested in foreign status, this is a great site World Bank. Information on inflation rates in the European Union is provided by Eurostat.