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Have you noticed that things are getting more expensive in Germany over time? Yes. Because of inflation in Germany, 1 EUR today will not buy the same value of goods in 10 years. In this article, we will explain what is inflation and what is causing it. We will also discuss the best investments that can help you to profit from inflation in Germany.
A short summary for the busy people
If you don’t have much time, here is a short summary of the different investments and their effectiveness when coming to inflation in Germany:
|Good for inflation?||Pros||Cons||How to invest?|
🔹Good for fighting small or moderate inflation if done correctly
🔹Choose your stock carefully or get a diversified portfolio using ETFs
🔹Invest with very little capital with an ETF saving plan
🔺Even bigger companies will face problems if the inflation rate is too high
🔺A long term investment
|Real Estate||✅ Yes|
🔹You can profit from inflation if you can transfer the cost to the tenants by charging a higher rent.
🔹Property prices usually go up in line with inflation.
🔹Invest with very little capital with Reinvest24 or via ETFs
🔺In Germany, it is usually difficult to increase the rent significantly and quickly.
🔺A lot of transaction costs and high initial investment
🔺Ongoing costs associated with your real estate.
🔺Illiquid: cannot cash out quickly
🔺A long term investment
🔹Buy your own house (use a free online mortgage calculator)
🔹Use an all-inclusive service to buy your property
🔹Use a real estate investment platform such as Reinvest24
🔹Buy a real estate fund or ETFs.
🔹A good way to fight inflation in the long term
🔹Dynamic contribution allows you to adjust your future pension amount with inflation
🔹Get a yearly government bonus (see in this calculator)
🔹Big tax savings
🔺A long term investment
🔺Only make sense if you stay in Germany
🔹Riester-Rente and Rürup-Rente in Germany
🔹Compare different offers for Riester-Rente here
🔹Contact my financial adviser and mention my blog “My Life In Germany” to get a free English consultation.
🔹Good for fighting small or moderate inflation
🔹High return relatively (on average more than 10% yearly)
🔹Short term investment (as short as a few months)
🔹Start with as low as 10 Euros
🔹Get paid weekly
🔹BuyBack Guarantee to reduce risks
🔺Performance depends on the companies behind the P2P loans
🔺The fixed interest rate may not catch up with the rising inflation rate
🔹Use a P2P platform such as Income Marketplace
🔹Can help you to beat inflation in a low inflation environment
🔹An inflation-indexed bond will give you a return adjusted to inflation
🔹A government bond is very safe
🔺The fixed interest rate may not catch up with the rising inflation rate
🔺Rising inflation often results in lower bond price
🔺The interest rate return for government bonds or inflation-indexed bonds is very low
🔹The price of commodities usually rises along with inflation.
🔹The supply of precious metals like gold is limited
🔺Investment is very speculative and risky
🔺Gold price may not necessarily rise with inflation
🔺Gold does not give you interest or dividend
🔺The storage and protection cost of Gold will increase along with inflation
🔺Gold should be a long term investment
🔺Commodity prices are volatile (can be affected by war or any geopolitical conflicts)
🔹Purchase gold bullion directly
🔹Invest in a mutual fund or an ETF that specialized in gold
🔹Crypto has a limited supply
🔹Safe from government manipulation
🔺Investment is very speculative and risky
🔺Price only depends on how many people believe in it
🔹Use a crypto exchange such as Coinmama.
🔹Very safe investment
🔹It can only fight inflation if the interest rate is higher than the inflation rate
🔺The fixed interest rate may not catch up with the rising inflation rate
🔺Currently, the interest rate is too low and your “real return” can be negative
🔹Compare different offers here.
🔹The price for these goods may rise along with inflation
🔺No central trading place
🔺Hard to tell the worth of the valuables
🔺Illiquid: cannot cash out quickly
🔺This investment is only good for the experts
🔹Find a seller if you are into any exotic valuables
Keep on reading for more details about each of the investments above and learn how you can profit from inflation.
Disclaimer: The statements, comments and other content contained in this article, even if individual issuers or financial instruments are mentioned, are not to be construed as investment advice and do not constitute, directly or indirectly, a recommendation or solicitation to invest, buy, hold or sell any financial instrument or any advice relating thereto. You are responsible for your own risk if you decide to participate in any form of investment.
What is inflation?
We always hear the term inflation. But what does it mean exactly?
Inflation means that there is an increase in the average cost of goods and services over time. And this increase is expressed as a percentage. The inflation rate is calculated by tracking the price changes of a standardized basket of goods.
An inflation rate of 2% per year is normal in Germany. However, when the inflation rate is getting higher, it can be a problem especially if your salary in Germany is not catching up with the inflation rate.
Your currency is depreciating
When there is inflation in Germany, it means that your EUR currency is depreciating. Your money does not worth as much anymore. And you cannot buy the same goods and services with the same amount of money. In other words, things get more expensive.
So, everybody wants to exchange their money for goods or services, before they get even more expensive. This increases the demand for goods and services and drives up the price even further. A vicious cycle is formed.
The inflation rate in Germany
According to Destatis, the inflation rate in Germany is expected to be 10.4% in October 2022. This is a very high level. What does it mean for you?
If a car cost 25,000 Euro in 2021, it will cost 10.4% more in 2022 (=27,600 Euro). You will have to pay 2600 Euro more for the same car after one year!
What is causing inflation?
Below are some reasons why your currency can be devaluating.
Higher demand for goods and services
The price of goods and services is determined by supply and demand. When demand rises and supply remains unchanged, the price goes up. There can be different reasons for the increase in demand.
For example, if the interest rate is low, people tend to spend more money because they cannot get much interest by putting their money into a savings account. Besides, the low-interest rate causes more people to get a mortgage. So, it drives up the demand for properties and their prices.
In Germany, the interest rate has been closed to zero now for many years. The European Central Bank is responsible for setting key interest rates for the euro area. The government often wants to keep a low interest rate as this can increase demand for goods and services. So, it can help the economy of the country.
Price increase of raw materials
Raw material such as oil is very important for producing and transporting products. When oil price increases, the cost of production increases. To remain profitable, companies will transfer these costs to the end customers by increasing the selling price. This drives the increase in the price of the final products.
In Germany, part of the reasons for the high inflation is due to the price increase in electricity, gas, and heating oil. In 2021, the gas price has increased by almost 47 percent, while the price for electricity and heating oil has increased by 18% and 40% respectively.
Increase in money supply
If a government simply prints more money, it is actually “stealing” money from its residents. When the money supply increase and the supply of goods and services remain unchanged, there will be a devaluation of the currency. There are more money in circulation and the money will not be worth as much as before.
An increase in money supply drives up spending. People buy more. This increases the demand for goods and services and also their prices. While the government can enjoy the “free” printed money, residents suffer as their money is losing value. The value of their savings has been “stolen” silently.
What is hyperinflation?
Hyperinflation happens when there is an extremely fast and uncontrollable price increase. This has happened in Germany in 1923.
At that time, to finance the war debt, the government kept printing money without any economic resources to back it. This resulted in hyperinflation in the end.
During that time, the value of the German currency (Mark) fell at such a fast rate that employees needed to be paid daily. People carried their money in big bags and suitcases and use them to buy goods as fast as possible. The shops kept increasing their prices because the Mark was depreciating rapidly. Some shops even accepted food and coal as the only medium of exchange. The currency could not function anymore as a general means of payment or store of value.
To give you an example, a loaf of bread in Berlin cost around 16 Marks at the end of 1922. By late 1923, it costed 200,000,000,000 Marks. And by November 1923, one US dollar was worth 4,210,500,000,000 Marks.
Hardly imaginable, right? So, you can see that hyperinflation is a nightmare for the whole society and the economy.
What can the government do against inflation in Germany?
One way to fight against inflation in Germany is to increase the interest rate. In fact, the European Central Bank has already increased the interest rate in 2022.
The reason is that by increasing the interest rate, banks will borrow less money from the central bank. It means that the money supply will decrease. There will be less money in circulation and more people will put money in their savings accounts. This causes less spending and a price decrease in goods and services.
Inflation in Germany – Who are the winners and losers?
Everything has two sides. Some people and organizations profit from inflation in Germany. For example, people who have debts at a fixed interest rate. If the inflation rate in Germany is higher than the interest rate of the loan, the borrowers will be better off.
On the other hand, the creditors suffer because the loan is losing value more than the interest rate they earn. As mentioned before, savers who hold money lose because their savings have less purchasing power.
Employees also lose if their salary cannot catch up with the inflation rate in Germany. It is because their salary is not worth as much as before. They cannot buy the same amount of goods and services with the same salary.
How can inflation in Germany affect your investment?
Investment with a fixed return
If you have investments where you generate long-term fixed cash flows, inflation will decrease the purchasing power of your future cash flows. An example would be if you have a bond that pays you a fixed bond interest regularly. The bond price will fall as a result.
Similarly, let’s say you have a saving account where you earn a fixed interest. You will be worse off as well if your interest rate is lower than the inflation rate in Germany. This is the case in Germany where the interest rate of the savings account is closed to zero and the inflation rate is 10% at the moment.
Investment for your retirement
If you are saving money for your retirement in Germany, make sure you take into account the inflation rate when you plan your retirement savings amount. Your cost of living in Germany may be 2,000 EUR per month now. But you will likely need a much higher monthly budget 30 years from now.
The money in your bank
If you have money sitting in your bank, the value of the money is slowly disappearing. Let’s say you have saved 100k Euro in your bank account in Germany. With an inflation rate of 10% in Germany, you will lose 10k Euro purchasing power in a year. It means that you can only buy things that are worth 93k Euro with your money after one year. That is a lot to lose!
That is why it is important to protect yourself actively against inflation. You should diversify your investments and hold assets that perform better with the rising inflation in Germany. These can be assets with adjustable (but not fixed) cash flows. For example, stocks and real estate may help you to profit from inflation.
What investment may profit from inflation in Germany?
Now, you know that investing your money is a way to fight against inflation in Germany. But what kind of investment is good?
Some forms of investment are better than others when coming to inflation. In this session, we will have a look at different forms of investment and assess how suitable they are under an inflation environment.
Disclaimer: The statements, comments and other content contained in this article, even if individual issuers or financial instruments are mentioned, are not to be construed as investment advice and do not constitute, directly or indirectly, a recommendation or solicitation to buy, hold or sell any financial instrument or any advice relating thereto. You are responsible for your own risk if you decide to participate in any form of investment. No investment can guarantee a profit. Every investment is associated with risks and can lead to a complete loss of your invested money.
Investments that may profit from inflation in Germany
1. Investment in the stock market
Can you profit from inflation in Germany with stock investment?
Investing in stocks may be a good way to fight inflation. When there is inflation, companies can increase the price of their products. It means that their revenues should increase at a similar rate as inflation. This causes their stock prices to increase as well.
So, if you invest in stocks, your stock price may increase in line with inflation.
What kind of stock investment may help you to profit from inflation in Germany?
It is very important what kind of stocks you are buying. For example, it may be better to buy stock from companies whose products are always needed. These can be companies that sell raw materials, staple food, or energy. The demand for these products will always be there even when there is an economic downturn. And consumers cannot easily save on those costs.
Another type of investment during inflation time is stock from companies that require little capital to run their business. For example, the technology business. They are less affected by inflation because they do not need a lot of natural resources to run their businesses.
It is less risky to invest in companies that are big and international. Such companies can easily transfer their increasing cost of production to the consumers by raising their prices.
What is the best stock investment strategy to profit from inflation in Germany?
You may want to diversify your stock investments to reduce your risks. You may do so by buying stocks from different companies in different countries. If you do not want to spend time researching which companies to invest in, an easy way is to invest in an ETF fund.
What is ETF?
ETF stands for exchange traded funds. These funds follow a particular stock market index, such as the German stock index DAX. DAX includes 40 major German companies trading on the Frankfurt Stock Exchange. When you invest in a DAX ETF, your money will be invested in these 40 companies in a proportion just like the DAX index.
The fees are much cheaper to invest in ETF compared to other investment funds. It is because ETFs just follow an index and no fund manager is needed.
What is an ETF saving plan?
An ETF saving plan is especially interesting for young people because it requires very little capital to invest. You do not need to have thousands of Euros to start your investment. Instead, you can pay a small amount monthly from your salary. You can increase your wealth slowly this way and prevent inflation from stealing the value of your money.
My personal experience
I personally invest in the DAX ETF and also the MSCI World ETF. The MSCI World Index includes more than 1,500 companies across 23 developed countries. It helps me to diversify my stock investments easily without the need to spend time doing financial research on each company.
How long should you hold your stocks?
To beat inflation, it is better to treat stock as a long-term investment. If you are trading stocks in a short period, it is speculative and your profit or loss will be affected by the short-term price fluctuation.
For example, let’s say your ETF generated an average annual return of around 10%. When there is a normal inflation rate of 2%, your real annual return will be 8% if you hold the ETF for the long term. So, investing in stocks may help you to beat inflation in the long run. This is true as long as your stock investment generates a return higher than the inflation rate.
What is a robo-advisor?
A robo-advisor is a digital wealth management system. It allows you to open a profile, stating your individual preference and risk tolerance level. Based on your profile, a machine will help you to invest in different ETF funds globally and monitor your trading activities daily.
There will be a portfolio manager who checks your investment portfolio to make sure your money is invested wisely. So, your portfolio is managed by both humans and machines.
For example, Deutschebank has a robo-advisor called ROBIN, where you can start investing with only 500 EUR. ROBIN helps you to invest in a diversified ETF portfolio globally based on your individual risk preference. The fees are low (around 1%). You can pay in and take out money any time.
ROBIN is good for people who want to have a personalized and diversified investment without spending the time and effort in managing it.
Tips: If you are between 18-29 years old and register for a new ROBIN account before 31 Dec 2023, you can save the management fee of 0.75% until 31 Dec 2024!
How much should you invest in stocks?
Note that stock investment has its own risks. You should only invest a part of your money in stocks. How much you can invest depends on your personal situation.
For example, a younger person can usually afford a riskier investment. It is because they still have time to earn back their losses.
Besides the age, it also depends on your individual situation. For example, how much money you have, do you have any dependents, etc.
What are the drawbacks?
Note that stock investments work best to fight small or moderate inflation. If inflation is too high, there will be problems for the whole society and the economy. Even bigger companies will face problems in a very high inflation environment.
How to invest in stock to profit from inflation in Germany?
Investing in stocks or ETFs is fast and easy. What you need is to open a broker account which can be done online. Some best online brokers in Germany include Smart Broker and Trade republic. They are easy to use and have super low fees.
For more information and a comparison of different online brokers, check out this post: Best Online Broker Germany – Top 5 Comparison
Read also: How to Buy Stock at IPO Price in Germany?
2. Investment in the real estate market
The interest rate has been extremely low for some years now. In a low interest rate environment, real estate investment becomes more attractive. It is relatively cheap to get a loan to buy a property in Germany. For example, I got my bank loan in Germany with a 1% interest rate!
The inflation rate is rising in Germany and the interest rate is rising. So, if you are looking for a mortgage in Germany, you may need to hurry up a bit now to take advantage of the current low interest rate.
The easiest way is to use a free online mortgage calculator. Just enter the house price, your down payment amount, and some other basic info. You can then see the different mortgage options in minutes and consult with a financial adviser there about each option.
Can you profit from inflation with real estate investment?
During inflation time, property owners can transfer the cost to the tenants by charging a higher rent. This helps the property owners to increase their investment return to match the higher inflation rate.
Not only rent can be increased. The property price usually has a positive relationship with inflation as well. It means that during high inflation time, the property owner may also sell his property at a much higher price. Of course, this is only possible if he can find a buyer who is willing to pay the high price.
In the long run, real estate can be a very good investment option as a store of value during inflation times. Of course, you have to choose your property wisely. The location is important to ensure that your real estate value is going to rise in the future.
What are the risks?
There are costs involved in maintaining a property. For example, repair and maintenance costs. These costs are going to rise as well along with inflation.
Besides, if you need a bank loan to buy your property, the cost of financing your property can rise as well due to inflation. With inflation, the interest is likely going to rise. It may be more expensive for you to finance your property purchase. You may have to pay higher mortgage interest.
In Germany, it is usually difficult to increase the rent significantly and quickly. The tenants have many legal rights when it comes to renting a property in Germany. If you cannot transfer the rising costs to the tenants by charging a higher rent, you will have a lower return (or even a loss) on your real estate investment.
What are the drawbacks of real estate investment?
Real estate investment involves a lot of transaction costs compared to other forms of investment such as stock. Some examples include notary fees, mortgage interest, agent commission, etc.
There are also ongoing costs associated with your real estate. For example, you have to pay for repairs and maintenance, and also other house management fees.
Besides, real estate involves a high initial investment. Not everyone has the money to buy a property in the first place.
And if you want to sell your property, you will have to find a buyer. If you own a stock, you can sell it easily and quickly online. But if you own a property, there are lots of costs involved in selling and it can take time. That means you cannot cash out easily compared to other forms of investment.
How to invest in real estate?
In the below session, we will briefly talk about how you can invest in real estate in Germany. If you want more details on each of these options below, check out here: Real Estate Investment Germany – 3 Ways To Invest
Handle everything by yourself
The traditional way to invest in real estate is to handle everything by yourself. You will have to do your own research, find your property, get a mortgage, find your tenant and manage the tenant afterward.
This involves a lot of time and effort. And it can be overwhelming especially if you do not have prior experience. And if you are looking to invest in Germany, don’t forget that everything needs to be done in German.
Use an all-inclusive service
Alternatively, you can use an all-inclusive service to buy your property. This was what I have done. The service includes everything including property selection, location research, mortgage, tenant management, etc. You may even get extra services such as a rental guarantee and a rental pool.
What if you don’t have enough capital to buy a property?
Use a real estate investment platform
For people who have not saved up enough capital yet but want to profit from inflation, there are still options to invest in the real estate market. One way is to use a real estate investment platform such as Reinvest24.
With Reinvest24, you can start investing in real estate from 100 EUR already. The platform is in English. You can cash out any time and earn a 14.8% average return. This is great for people who do not have large capital or do not want the risks and effort involved in buying their own properties.
Buy a real estate fund or ETF
Another way to invest in the real estate market with a small capital is to buy a real estate fund or ETF. You can invest already with a small amount. These funds or ETFs are specialized in the real estate market. They are more diversified and may not only include residential properties, but also offices, shopping malls, etc.
How much should you invest in real estate?
Just like any other form of investment, you should not invest all your capital in the real estate market. In case the property price does not rise as expected (or even falls), the value of your investment will also decrease.
3. Investment in private pension plans in Germany
Public pension in Germany
In Germany, everybody has to contribute to public retirement insurance. Part of your salary is deducted from your payslip. You will receive your public pension when you are 67 years old.
In my opinion, it is a bit risky to only rely on the public pension in Germany. The public pension system is funded by the young people now and paid to the old people.
Due to the aging population, the retirement age has been pushed from 65 to 67 years old. You never know what will happen by the time you retire and if you will get enough pension to live.
Invest in your pension as early as possible
One way to fight inflation is to invest your money for the long term. It is important to think about your retirement as early as possible because of the compound effect.
Here is an example. If you invest 10k EUR today into a pension plan that has an 8% annual return, you will get more than 100k EUR after 30 years.
However, if you start investing in your 50s, you will only have 10 years until your retirement. In that case, investing 10k EUR will give you less than 22k EUR after 10 years with the same 8% return.
Private pension plans in Germany
There are two popular private pension plans in Germany: The Riester-Rente and the Rürup-Rente. They are supported by the German government. So, you get a government bonus and tax savings while investing in these private pension plans.
How can you profit from inflation with private pension plans?
With private pension plans, you can often choose to pay a dynamic contribution. It means that every year, you can increase your contribution by a few percent as an adjustment to the inflation rate. Of course, your future pension amount will also increase accordingly.
As mentioned before, a pension is a long-term investment. Due to the compound effect, your pension return will likely beat the inflation rate in the long term. This helps you to profit from inflation in Germany.
What are other benefits of private pension plans?
You can get a government bonus yearly if you have a Riester-Rente. The bonus is quite a lot, especially if you have kids. For the exact bonus amount, you can refer to this calculator.
You can also compare different offers for Riester-Rente here.
If you earn a high income in Germany, Rürup-Rente can be very interesting because you can deduct a lot of tax from it. It also provides you with a guaranteed life-long pension.
The drawback of private pension plans in Germany
Investing in private pension plans is a long-term decision. You pay now. And you get the benefit after you retire. It is not as flexible as other short-term investments such as stocks because you do not have the choice to take your money out earlier.
Besides, it only makes sense if you plan to stay in Germany for the long term. If you do not live in Germany, you cannot get the government bonus. So, it will not make sense to invest in such pension plans anymore.
For more details about the Riester-Rente and Rürup-Rente in Germany, check out my article here.
Consult a professional
Private pension plans are very complicated. Even if a foreigner knows German well, the plans are still not easy to understand. I joined these plans with the support of an independent English financial adviser.
I would highly recommend my adviser to you if you are interested in these pension plans. Just write him an email and mention my blog “My Life In Germany” to get a free English consultation.
Investments that are moderately good for fighting inflation in Germany
1. Crowdlending investment
What is it?
Crowdlending is also called Peer-to-Peer lending (P2P lending). Here is how it works. Traditionally, getting a loan from a bank involves a very high-interest rate. On the other hand, when you deposit money in your bank, you earn almost no interest. Your bank may even charge you a monthly fee.
Because of that, lending platforms (also called P2P platforms) are invented. These platforms are online. So, they don’t have to pay for expensive branches or employees like a traditional bank.
Borrowers are usually companies who need money to fund their projects. They now use these P2P platforms to get their loans, which is much cheaper than getting their loans at traditional banks.
P2P platforms put investors’ funds together and lend them to the borrowers. In return, investors earn a high interest rate by lending these loans. The interest rate is typically more than 10%.
How may crowdlending investment help you to profit from inflation in Germany?
The return of crowdlending investment is quite high compared to many other investment types. To profit from inflation, you need a return that is higher than the inflation rate.
For example, with the P2P platform Income Marketplace, the return can be up to 15% per year. Even when there is an inflation rate of 10%, you will still make a real return of 5% from your investment.
Unlike stocks or real estate investments where you have to invest your money for the long term, crowdlending investment can be a short-term investment.
For example, Income Marketplace allows you to invest for as short as a few months only. Besides, you can start with as low as a 10 Euro deposit. This helps you to remain flexible, especially in the uncertain inflation environment.
What are the risks?
The risks of crowdlending investment are similar to those of stock investment. It depends on the performance of the companies behind the stock or the P2P loans.
With stock investment, if the company behind your stock fails, your stock price will decrease. With crowdlending investment, if the companies (borrowers) behind the P2P loans fail to pay back, you will lose your capital.
P2P platform like Income Marketplace has safety features such as Buyback Obligation. This reduces the risks for individual investors.
However, remember that if you want to lend to a high-return loan, your risk will also be higher. Risk and return are always positively correlated, regardless of what investment you do.
What are the drawbacks when using the crowdlending investment to fight inflation?
Similar to bonds, the annual interest rate is fixed for crowdlending investment. So, crowdlending investment works best under a low or moderate inflation environment. If the inflation is very high, your real return will be lower.
In an uncertain rising inflation environment, it may be better to invest in short-term P2P loans so that you are not tied to a fixed interest return for too long. You can then adjust your investment strategy based on how the inflation rate develops.
2. Investment in bonds
What is a bond?
A bond is a loan that you lend to a borrower. This can be a company or the government. There is a fixed term for the loan, e.g. 5 years. By the end of the term, you can get back your capital. And during the loan period, you will get an interest payment in return. Traditionally, bonds pay a fixed interest rate.
Even though the term can be many years, you do not have to hold the bonds until maturity. You can sell your bond freely during the term.
What determines the bond’s price?
The price of the bond fluctuates with the general interest rate (e.g. interest rate in saving accounts). When the general interest rate goes up, the bond price will go down, and vice versa.
For example, if a bond has a fixed interest rate of 5%, and the general interest rate is 8% now, it will become less attractive for people to buy this bond. It is because people can get 8% by depositing their money somewhere else instead of buying the bond. As a result, the price of the bond will drop.
What determines the bond’s interest rate?
Bonds with very long maturity dates usually have a higher interest rate. It is because investors will have a higher risk. After all, the general interest rate and inflation may change over a long period.
Another factor is the credit rating of the borrower. The greater the risk, the higher the bond’s interest rate. For example, lending money to the government is very safe. But that’s also why the interest rate is extremely low (or none).
Can you profit from inflation by investing in bonds?
When you look at the interest return from a bond, you should also consider the inflation rate. In a low inflation environment, investing in bonds can help you to beat inflation, as long as the bond interest rate is higher than the inflation rate.
For example, if you have a bond that pays 5% annual interest and the inflation rate is 2%, your “real return” will be 3%. In this case, investing in the bond helps you to protect your asset against inflation.
However, in an uncertain inflation environment, investing in bonds may not be very effective to fight inflation. It is because inflation may rise higher than the fixed bond interest rate. In that case, you will have a negative “real return” when you invest in the bond.
Pick bonds with a short term
That is why it may be better to avoid investing in bold that have a very long term. Some bonds have a term of 10, 20, or even 30 years! You do not need to tie yourself to the fixed interest rate for long if you have a short-term bond. To profit from inflation, you can adjust your investment strategy accordingly based on the trend of the inflation rate.
With a short-term bond, it is safer and you can access your money easier. Rising inflation often results in a higher general interest rate in other investment types such as fixed deposits. This will negatively affect the bond price. It may make more sense to invest in fixed deposits if their interest rate rises higher than the fixed bond return.
In other words, a short-term bond will be less affected if the general interest rate (e.g. fixed deposits) starts to go up rapidly.
What are inflation-indexed bonds (inflationsindexierte Bundesanleihen)?
An inflation-indexed bond is designed to protect your asset against inflation. If you buy an inflation-indexed bond that has a 1% interest rate for 10,000 EUR, you should get 10,100 EUR back after one year. With this bond, you will not only get the interest but also inflationary adjustment if any.
Let’s say the inflation rate is now 5%. In that case, you will get 10,100*1.05=10,605 EUR back after one year.
Note that the interest rate of an inflation-indexed bond is much lower than that of a traditional government bond that has no inflation adjustment.
How risky are bonds?
Buying bonds is in general less risky than buying stocks. It is because bonds guarantee you an interest return and the return of capital at the end of the term. There is no guarantee when you invest in stocks. You can lose your capital when the stock price goes down.
Similar to buying stock, if you buy bonds from companies, you need to pick companies that have a bright future. You may lose your capital if the companies go bankrupt.
How to choose which bond to buy?
Which bond you should buy depends on how much risk you can take. It is safe to buy bonds from bigger companies. But the bond interest return may not be as high as those of smaller companies.
If you want to be very safe, you can buy government bonds. However, government bonds may not have much return. It may even have a negative return!
Again, the higher the risk, the higher the interest return.
How to buy bonds?
You can buy bonds in the same way as when you buy stocks. The easiest would be to use an online broker. If you are looking for a cheap and good broker to use, check this out: Best Online Broker Germany – Top 5 Comparison
3. Investment in commodities such as gold
Commodities are a broad category. Some examples of commodities include precious metals, oil, grain, natural gas, etc. When there is inflation, the prices of commodities (e.g. raw materials) usually rise along with the inflation. So, some people believe that commodities are a good way to profit from inflation.
Why is it popular to invest in precious metals?
A popular investment to profit from inflation is to invest in precious metals such as gold, platinum, and silver. It is because the supply of these metals is limited. Besides, they are independent of the government and central bank. So, they are free from political manipulation.
There are many reasons why people like to invest in precious metals, especially gold. Gold is one of the oldest means of payment in the world. It is valuable in every culture. Many people think that gold is a safe investment, especially in an unstable economy and a low interest rate environment.
What are the risks?
Investment in precious metals is very speculative. Similar to cryptocurrencies, the value of gold depends only on how many people believe in its worth. There is no guarantee that the gold price will keep increasing.
Gold price usually rises when demand increases. And demand increases mostly because of the instability of the money system. Note that even when there is inflation, it doesn’t mean that gold prices must rise.
Gold price is also very volatile. If you buy your gold at bad timing, you may need to wait for years until you can sell your gold again without a loss.
What are the drawbacks?
Compared to other investment types such as stocks or fixed deposits, investing in gold does not give you any interest or dividend. When the inflation rate rises, the interest rate usually follows. So, you can earn more interest in a fixed deposit. And gold does not give you any yields.
Besides, when you have gold, you can only store it. You cannot eat it or produce something from it. You also cannot live in it like in the case of a real estate investment.
Another disadvantage is the cost of storing gold. You need to keep your gold safe and protected. Not just against robbers, but also against damage. For example, you may want to put your gold in a good vault or keep it in your bank. This can cost you money regularly. With inflation, your cost of storage will further increase.
Should you invest in commodities?
Even though the price of commodities will likely rise along with inflation, investing in commodities can be very risky. The price depends on the supply and demand. It can be very volatile and unpredictable. For example, a war or any geopolitical conflict can affect prices significantly.
With gold, you may profit from inflation under certain conditions. When there is inflation, investors try to buy tangible assets that are likely to increase in value. Gold is one of them. It may not protect you from inflation in the short term, but it will likely be a good way to store value in the long term (decades).
So, if you want to profit from inflation by investing in gold, it should be a long-term investment. You can see it as an alternative currency during a crisis time.
While there are other better types of investment to profit from inflation, it is good to have a diversified portfolio. As a rule of thumb, you may want to invest between 5 to 10 percent of your portfolio in gold or other precious metals.
How to invest in gold or other commodities?
You can purchase gold bullion directly. You can then have your gold physically. But you will have to take care of the storage and protect it against damage.
Another way is to invest in gold indirectly by buying a mutual fund or an ETF that specialized in gold. Similarly, if you want to invest in other commodities, the easiest way will be via ETFs. For example, this ETF allows you to have a portfolio of various commodity contracts across seven different sectors.
To invest in commodities via ETFs, simply open an online broker account. It is cheap and easy. And you don’t have to worry about owning your gold physically.
Investments that are not suitable for fighting inflation in Germany
1. Investment in cryptocurrency
Some people see cryptocurrencies as an investment to profit from inflation. There is some truth in this. Cryptocurrencies have a limited supply. Its value is determined by the demand and no one single organization (including the government) can manipulate its supply.
Can you invest in cryptocurrency to profit from inflation?
Cryptocurrencies are not (yet) widely adopted. And the price can be extremely volatile. For example, Bitcoin was almost 60k EUR in Nov 2021. It dropped to 20k EUR in Aug 2022. So, investing in cryptocurrencies is highly risky and speculative. You can lose all the money you put in.
With that said, investing in cryptocurrency is not a good way to profit from inflation. To profit from inflation, it is better to invest in something else that is safer and more stable, e.g. certain stocks or bonds.
Should you invest in cryptocurrency at all?
If you have some extra “play money” that you can afford to lose, you may want to invest some in cryptocurrencies. As a rule of thumb, you should not invest more than 5% of your overall portfolio in cryptocurrency.
I personally do invest some money in cryptocurrencies as I believe in their future. You can use a crypto exchange such as Coinmama to buy cryptocurrencies.
For more details, check this out: Best Crypto Exchange in Germany – Compare the Top 5
Disclaimer: Investing in cryptocurrencies is highly risky, complex, and speculative. Performance is unpredictable and past performance is not indicative of future results. Cryptocurrencies are subject to high fluctuations in value and your investment may result in a complete loss at any time.
I am not a financial advisor and I cannot give you any investment advice! What I wrote above is simply my personal opinion. This is not an investment recommendation. Read it at your own risk.
2. Investment in a fixed deposit account
Some people are very afraid of risks and want to avoid risks as much as they can. Unfortunately, investment all comes with risk. If there is no risk, there is no return.
Different investment types involve different risk levels. One of the safest investments is to put your money into a deposit account where you can earn a fixed interest.
Can you invest in a fixed deposit account to profit from inflation?
It depends on how much interest you can earn with a fixed deposit account. In the last few years, the interest rate has been extremely low. So low that it is close to zero. It means that if you put your money in a fixed deposit account, you get more or less nothing out of it.
The inflation rate in Germany is expected to be 10.4% in November 2022. Even if you find a fixed deposit account that gives you a 1% interest rate, you will end up losing 9.4% of your purchasing power by depositing your money there.
So, no, you cannot invest in a fixed deposit account to profit from inflation given the current situation. It will help you to lose your purchasing power slower. In the above example, instead of losing 10.4%, you lose 9.4% only.
Should you invest in a fixed deposit account?
The interest rate will likely go up along with the inflation rate. If the interest rate keeps up with the inflation rate, a fixed deposit account can help to fight against inflation.
However, putting your money in a fixed deposit may not be perfect due to its low return and inflexibility. Inflation can rise faster than your interest rate. You may not want to tie yourself to a fixed return rate.
Other investment types such as stock or real estate may be much better choices if you want to profit from inflation.
To learn more about fixed deposit accounts, check this out: Invest in Germany to Make Money – Fixed Deposit Account
3. Investment in jewelry, arts, or other valuables
You may think that luxury goods such as diamond rings or exotic paintings can protect you from inflation. In theory, they can. However, unless you are a specialist in these goods, you may not want to invest in them.
Why are luxury goods not a good investment to profit from inflation?
The problem with these luxury goods is that there is no central trading place for them. Unless you are a specialist, it is hard to tell the worth of these goods. The market lacks transparency.
There are usually not many buyers in this market. It may take time for you to find the right buyer when you want to sell your goods. This makes it difficult for you to cash out quickly at a good price.
So, investment in luxury goods is only for the experts. As an average investor, you may want to stay away from this kind of investment.
Reducing your expenses during inflation time (without lowering your living standard)
If you want to profit from inflation, it is not just about investment. If your salary is not catching up with the inflation rate, you will have less “real money” to spend. So, on one hand, you need to invest your money to store its value. On the other hand, you need to cut your expenses.
Reducing your expenses does not necessarily mean that you have to lower your living standard. The easiest way to do it is to review all your recurring subscriptions to see if you still need them or if there is a cheaper option.
Below are some examples.
We saved 130 EUR per year while using the same amount of electricity. This is easily done by just switching our electricity provider. We recommend using Ostrom as it is 100% green energy and has a fair price. Alternatively, you can find another electricity provider in Germany by using a comparison tool.
Check out this article for more tips to save on electricity costs: Electricity in Germany – How to Save Money and Find the Best Provider
If your internet contract is ending, you may be able to get a big discount by quitting your contract and signing up again as a “new customer”. This was the trick we used to get a big discount from our existing internet provider.
You can check out how we did it here: Best Internet Providers in Germany – Top 4 Comparison
Are you paying monthly fees for your bank account? You shouldn’t! There are still banks in Germany that charge zero fees (and also offer English services!).
Check out this article for more details: Opening a Bank Account in Germany – 6 Best Bank Accounts With English Services
Credit card fees
You shouldn’t be paying fees on your credit cards. There are credit cards in Germany that charge zero fees and may even give you travel insurance for free!
Check out this article for more details: Free Credit Card in Germany – Top 6 For Travel and Cashback
Streaming platform subscription
Are you subscribed to different streaming platforms such as Amazon Prime or Netflix? Do you really need all of them or maybe you can just use one of them? How about Spotify? Do you really need it?
Think about how much you are paying and how much you use each of these apps. Decide if you should keep paying them or not.
For more tips about different streaming options in Germany, check this out: Streaming in Germany – 11 Ways To Do It Legally
There are many types of insurance in Germany. Some of them such as health insurance or car insurance are mandatory. For some others such as liability insurance, it is not mandatory but highly recommended. If you have many different insurance contracts, you may want to review them to see if you really need all of them.
If you still have insurance contracts from your home country, you should review the terms to see if your insurance in Germany can cover you abroad as well. It is important not to be underinsured. But it is also bad to be overinsured.
To learn about each type of insurance in Germany and if you need them, check this out: Insurance in Germany – Which one do you need?
The price of Diesel and Gasoline is getting more and more expensive these days. To cut down on fuel costs, you may want to use other transportation methods if possible. For example, biking, taking a bus or a train, etc.
But there are also ways to spend less on fuel costs if you continue to drive. For example, do not make an extra car drive just to go shopping. Instead, you can drive past the supermarket on your way to or back from work.
To further save on fuel costs, you should compare the price of different gas stations. Check what time of the day is the cheapest to go refueling. You may be able to save as much as 20 cents per liter by doing so. If you need to fuel 40 liters, you can already save 8 EUR for each refuel.
So, you see, reducing your expenses may not be as difficult as you think. You should also check your other contracts such as phone contracts, fitness studio subscriptions, magazine/ newspaper subscriptions, or even your mortgage contract. You can save a lot of money as this is not just a one-time saving. But your savings will continue in the months or years to come.
Check out these article for other tips about saving money in Germany:
- Cost of living in Germany – How to save money?
- How to Save Money During a Crisis – 8 Best Tips to Save and Earn
8 Tips to profit from inflation in Germany
1. Always consider the inflation rate when looking at the investment return
When you are choosing your investment, you should not just look at the return rate but also the inflation rate. For many years in the past, the inflation rate in Germany was kept at a low level. Around 2%. So, in a normal year, you should be looking for an investment that gives you more than a 2% return to profit from inflation.
When the inflation rate is 2%, an investment with a 2% return just means that you will not lose money. The goal of your investment should not be just offsetting the inflation rate, but also growing your money. So, you need to aim at a higher return rate than 2%.
Currently, the inflation rate in Germany is very high (expected to be 10.4% in November 2022). This makes it even more important to preserve the value of your assets. You should look for an investment that generates a high return so that your money will not lose its value during inflation times.
An investment with a 4% return sounds great. But it is not great when the inflation rate is 10%. By putting money in this investment, you will have a negative “real return” of 6% after considering the inflation rate. That means you will have a loss.
2. You need to actively protect the value of your assets
It is easy to be lazy and just let your money sit in your bank. But it is costly. Even though you cannot see the cost physically. The value of your money is slowly disappearing. You may not even notice it.
Imagine having 100k EUR in your bank and the inflation rate is 10%. When you do not do anything, you are actually paying 10k EUR per year for keeping your money in the bank. Sounds like a lot now?
That is why you may want to actively take action to avoid this invisible loss of your purchasing power.
3. Diversify your portfolio
It is very important to diversify your portfolio when you invest. Don’t put all your eggs in one basket. In case something happens to one asset class, you will not lose everything if you have a diversified portfolio.
4. Consider your individual risk-tolerance level
Everyone has a different risk-tolerance level based on his individual situation.
For example, young people can accept more risks in general. It is because they still have time to earn back the loss in the future. Single people with no dependents can also accept more risks.
On the other hand, older people who are going to retirement should not start any high-risk investments.
Even in a high-inflation environment, you should never have an investment portfolio that is out of your risk-tolerance level.
5. Know the goal of your investment
People can have different goals when they invest. Some goals are short-term. An example is to save up money for a vacation.
A medium-term goal can be to buy a car or save up the initial capital for buying a house.
A long-term goal can be growing your money for your retirement.
Knowing your goal is important because you need to find an investment that fits your goal. For example, if you are saving for your retirement, you may choose to invest in private pension plans, real estate, or ETFs.
On the other hand, if you want to have a short-term goal, some crowdlending platforms such as Income Marketplace allow you to invest for as short as a few months.
Don’t buy stocks that aim at long-term growth if your investment goal is short-term, or if you need to have your retirement income soon.
6. Have some buffers
Even though holding some cash comes with costs (losing value during inflation time), you should still keep some cash as a buffer. Do not invest all your money. You need some liquidity.
For example, depending on your personal situation, you may want to keep about 3 months of your net salary in your bank as a buffer. In case of an emergency, you will still have some money to use.
7. Only invest money that you can afford to lose
Any investment comes with risk. The higher the risk, the higher the return. There is no return when there are no risks. Even with traditional inflation hedges, there is no guarantee that they must work.
If you have a long-term investment goal, you need to accept the fact that your investment can have a lot of price fluctuations over time. Once you invest the money, be prepared that you are not going to cash out any time soon (even for decades).
An example would be real estate investment. This is a long-term investment. You will only know your return many years later. Whether your investment will have a good return is unpredictable. Nobody knows what happens in 10, 20, or even 30 years. Even though the real estate market looks good now, there is no guarantee that it will always stay so.
When you invest, you need to know that your invested money can be lost. So, you should only invest so much that you can afford to lose. Never invest money that you need for your living expenses. For example, if you know that you need this money to pay for your rent next month, do not invest it!
8. Don’t forget about tax
When calculating your investment return, don’t forget that your investment income will be taxed in Germany. The investment tax in Germany is 25% for all the capital gains.
However, in 2023, you have a tax allowance of 1,000 EUR yearly on your capital income. For real estate, you can also avoid the 25% capital tax if you owned your investment property for 10 years.
For more details, check this out:
- Tax Return in Germany – Expat English Guide
- 11 Best Tax Return Software Germany – Suitable for Anyone
Get professional help
Tax impact is one of the most important factors when deciding how you should invest in Germany. Please note that we are not qualified to give you tax advice according to German law.
If you are not an expert, I would highly recommend that you get professional advice from a tax adviser. You should fully understand every aspect before making your investment. You can use Yourxpert to get a free online initial assessment from a tax adviser.
Simply write your question in the below question box to get a free online initial recommendation from a tax adviser. If further actions are needed, you will get a non-binding offer with the price and you can decide if you want to go for it.
The importance of having a financial adviser
A financial adviser looks at your overall financial situation (income and expenses, future goals, risk level, etc.). He then suggests you some suitable forms of investment to profit from inflation.
As an expat in Germany, it is challenging to understand all the complicated concepts and be informed of all the suitable investment possibilities.
We love our financial adviser who explains to us thoroughly different investment possibilities and the associated risks. He doesn’t work for a specific bank or company, so you can be sure that he can give you independent advice.
Just write him and mention my blog “My Life In Germany” to get a free English consultation.
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Please be aware that this article is intended to provide you with a general overview of investment options to profit from inflation. It is for informational purposes only.
The statements, comments and other content contained in this article, even if individual issuers or financial instruments are mentioned, are not to be construed as investment advice and do not constitute, directly or indirectly, a recommendation or solicitation to invest, buy, hold or sell any financial instrument or any advice relating thereto. You are responsible for your own risk if you decide to participate in any form of investment.
Please note that no investment can guarantee a profit. Every investment is associated with risks and can lead to a complete loss of your invested money.
You are responsible for your own risk if you decide to participate in any form of investment. Any losses you may incur are your responsibility. You should consult a qualified professional before making any financial decisions. Our blog makes no guarantee as to the accuracy or timeliness of the information in this article.
This blog is not a financial consultant by law and we do not accept any form of liability resulting from reading this article. We cannot give you investment advice or financial services.
What form of investment do you use to profit from inflation in Germany? What is your opinion on the different types of investment during inflation times? Leave a comment below and share your experience!
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