In a market economy, the prices of goods and services can always change – some prices rise, others fall. We talk about inflation when the price increase does not only affect individual goods and services, but is widespread. As a result of inflation, a currency loses value, which means it can be used to buy fewer goods than before; in other words, the value of the currency has decreased.
So for example, if today you earned 1,500 euros and your weekly groceries cost 50 euros before and now the same groceries cost 60 euros, then we can talk about 20% inflation. In order for your purchasing power to be the same, your salary should also increase to 1,800 euros.
What affects inflation?
Various factors. When calculating the average price increase, products on which we spend more money(e.g. electricity) are given more weight than products on which we spend less (e.g. sugar or stamps). In other words, one of the most important factors affecting inflation is the increase in the price of electricity, energy and fuel in general, which impacts the price of other products in turn. If it becomes more expensive for bakers to bake bread, they will eventually increase the retail price of the bread, especially since it is more expensive for them to transport this bread from the factory to the store.
It could be described as a cluster effect, where an increase in the price of some things begins to affect other things as well. It is not always the products with the biggest price changes that affect the inflation rate the most. The inflation rate also depends on the share of each product (or its weight) in the average household consumption expenditure.
If you’re interested in researching this, I’d suggest you look at the European Central Bank’s information page on inflation. The topic is explained in a very simple and understandable way, and the latest statistics are presented.
What can a person do to protect their savings against inflation?
I would mention perhaps the two most important things:
- By increasing your income and thereby increasing your ability to save.
- By investing your savings in such a way that the interest they earn exceeds the rate of inflation.
Where and how should you start if you have never encountered investing before?
Start by saving and putting money aside every month – that is, don’t spend it all. Today, unfortunately, we have a situation where many families have minimal or no savings, which makes them vulnerable in the case of unexpected expenses. In my first job I earned 550 euros a month, but I still managed to put 50 euros aside and after 10 months I had 500 euros and made my first investment.
Then come up with a plan that suits you. Keep in mind the principles of diversification – it is not wise putting all your eggs in one basket.
Do the preliminary work and read a little about the places and products where you intend to make your investments.
Get started and keep learning.
My recommendation would be to go to a bookstore and buy a book that teaches you how to get started. Today, there are several excellent books that teach the so-called ABCs of investing.
And then just start.
In these turbulent times, when there is a lot of uncertainty, where would it be good to invest?
As a warning at the outset, I will say that I do have a bias towards some of the asset classes that I know more about. Each person has to make the final investment decisions by themselves, after careful deliberation, and if necessary, in consultation with a relevant expert.
For me, the fact that there is uncertainty does not change much. If you are constantly saving and investing and have a long-term view, you will continue to invest as you did before.
However, depending on the different cycles, it might be worthwhile to review the focus and the scales, and consider where you are currently investing more money.
If, for example, it’s worth taking more risks in the growth stage by investing in a growth company or their shares, is it possible to increase it for products that are more stable, in order to generate stable cash flow?
So I would highlight three aspects to continue to consider.
First, be productive. When it comes to investing, it’s definitely important to look at productivity. This is especially so in an environment of high inflation. If, for example, productivity is 2% and inflation is 10%, the value of money actually decreases in the long run. If productivity is 10% and inflation is at the same level, then it can be said that money holds value and everything else above that again increases savings.
Second, if you have money in, say, a 2% deposit, it may not be all bad and has its advantages. As of today, deposits are nationally guaranteed up to 100,000 euros, which means that the risks of losing the amount are low. In the case of some investments where there are no guarantees, a return of more than 20% may be promised, but if this project does not succeed or the company goes bankrupt, then you will lose all your money, so inflation is no longer the most important aspect. In other words, another important aspect continues to be establishing your own risk tolerance.
Thirdly, I come back to diversity. Even though stocks may be in the red right now, in the long term there are definitely companies that will continue to generate profits, or increase their price, and continue to pay dividends in the future. So you should not give up everything now.
Perhaps it is worth finding products with a suitable income and risk ratio for you and, if necessary, adjust your strategies or plans. But you can also find others. Perhaps I should emphasize again that everyone has to find the right options for themselves.
Estateguru is a real estate lending platform with a focus on crowdfunding. What does it represent and how exactly does it work?
We mediate loans secured by real estate to the international investor community across Europe. On one side are entrepreneurs, in our case mainly real estate developers, who need capital, i.e. a loan, to implement their projects (for example, the construction of an apartment building), and on the other side, there are investors who invest in these projects with the amount suitable for them by signing loan agreements with the borrower.
We are there in between, standardizing the process for both parties and ensuring quality and a smooth user experience for all parties.
How does this benefit investors?
The investor has the opportunity to diversify his investments and earn interest that exceeds the European average inflation, and this in the form of a low-risk product. What I mean by this is that all of our loans are mortgage backed and the current active portfolio has an average expected return of 10.1%. If we compare, the inflation in the Eurozone is currently averaging 8.6%.
At the same time, it is possible to diversify not only in terms of the so-called asset class, but also geographically. Today, through our platform, you can invest in loans secured by real estate in the Baltics, Scandinavia, Central Europe, Southern Europe, and the United Kingdom. So you have the opportunity to reduce geographical risk as well.
The loan also means that you will get the money back monthly according to the loan schedule and at the end of the period; if everything goes well with the project, you will get both your money and your interest.
How popular is crowdfunding in Estonia today?
Estonia and the Baltics have become some of the largest markets for mutual funds in Europe when looking at investment volumes per capita. And with the Pan-European Regulation now in force, it is definitely becoming even more popular, because the regulation brings the entire sector under independent supervision. In the case of Estonia, it falls under the Financial Supervision Authority.
So who is it for?
For everyone who wants to diversify their savings and investments and protect themselves against inflation. In our case, you can start with 50 euros and it doesn’t matter what the amount is, because we treat everyone on the same terms. Which means that startup investors are investing at the same time as professional and institutional investors who are already investing in the millions.
What amount should I start with so that I can get some tangible benefit?
Everyone has to decide that for themselves. We should all have savings, to be prepared for the unexpected, and it’s even better if this money is somehow put to work for us. Of course, if you invest only a few percent of all your savings, either in Estateguru or in some other asset class, it won’t help you much against inflation, because the value of the remaining money will still decrease.
Investing always involves a certain degree of risk. How can a beginner investor make sure that various projects are safe?
Here, too, diversity continues to be important. The easiest protection is to not put all your eggs in one box and spread them around enough. If, for example, 1000 euros is divided between 20 different projects, it is significantly better than, for example, putting it all into one project.
Beginner investors should definitely familiarize themselves with the information offered and also with the provided statistics and overview of portfolios.
At the same time, it is worth knowing that at Estateguru, we have both in-house and external partners, both at the head office and at the country level, who review each project and conduct a risk assessment. In other words, only projects that have undergone a thorough credit analysis can access the platform. These same processes have been thoroughly analyzed by our institutional investors, who also invest on the platform. We have been on the market for over 8 years and today we have grown into the largest platform in this segment in continental Europe. To date we have financed over half a billion worth of loans and over 4,000 projects in 10 different European countries.