In periods of inflation, safeguarding savings through prudent investing can be a viable option, but there are fundamental rules to follow: avoid tying up money needed in the short term, diversify, set clear priorities, and seek professional advice when possible. Professional guidance can help keep investments aligned with goals and risk tolerance during uncertain times.
Investing is a task that requires thought, not fear. The starting point is a realistic assessment of whether part of income can be allocated to future needs, such as housing or other long-term goals. Depending on what each person aims to achieve, different strategies should be considered to fit the situation at hand.
Every investment carries some degree of risk. Generally, the higher the expected return, the greater the risk and the greater the chance of losses. As Fundación MAPFRE notes, investors should protect their legacy against inflation. Inflation erodes purchasing power as prices rise, limiting what money can buy over time. If savings sit in a bank account with little or no yield, their real value declines unless returns keep pace with or exceed inflation [MAPFRE Foundation].
profitable investments
There is no single formula for a good investment. A 5% return on a one-year horizon might be excellent, yet insufficient for a ten-year plan. Time becomes a crucial factor in investing, shaping whether a given return meets long-term objectives.
To determine competitiveness, one should aim for returns that exceed inflation. Inflation directly reduces the real value of money, affecting both savings and investments and highlighting the need for growth that keeps up with or outpaces price increases [Economic Outlook].
adapted
A practical rule is to invest only what one can tolerate losing or part with without compromising essential needs. Every investment involves risk, including the possibility of partial losses. Yet this framework helps gauge how much capital can be allocated as a starting point.
The key is to identify funds that are not urgently required. Building a buffer against unforeseen costs creates a safety net and provides stability during market downturns, making it possible to resist the urge to liquidate investments during stress. The buffer should be held in a safe, liquid vehicle that preserves purchasing power and remains accessible when needed.
The size of this emergency reserve depends on individual circumstances and needs, fluctuating with personal situations and financial obligations.
So, how much is appropriate? Three to six months of fixed expenses or income is a common guideline for a safety cushion. For example, if monthly fixed costs are 1,500 euros, a target range of roughly 4,500 to 9,000 euros would offer a comfortable safety margin before beginning investment activity.
Advantage
Having a financial cushion yields several benefits:
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Detours from unforeseen costs without derailing the investment plan.
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Ability to absorb unplanned spending during stock market downturns without selling investments at a loss.
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Ongoing liquidity and flexibility, ensuring funds are available for strategic moves while staying protected against erosion by inflation. The emergency fund should reside in a safe, liquid product that keeps value close to inflation and remains easily accessible when needed.
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The size of this non-investment asset base should reflect personal needs and circumstances.
Investors should watch for a video overview on managing cash reserves and long-term plans.
Invest according to goals (and time frame)
The second variable shaping how much to invest is the combination of financial and personal goals and the timeline for achieving them. This affects both acceptable risk levels and the recommended investment amount.
It is prudent to segment investments into short, medium, and long-term horizons. In the short term, a solid emergency fund or conservative instruments, such as insured deposits, can help protect capital. In contrast, longer horizons permit higher risk-taking and potentially greater rewards. Over time, as the objective approaches, risk should be reduced to protect wealth and preserve gains.
For retirement planning and long-term goals, the approach is to blend growth with risk management, ensuring that the plan remains viable through market cycles.
a case study
Many people today worry about the pension they will receive in retirement. An initial step is to quantify the income they need in retirement and then build a plan to reach that target. The guiding principle is to focus on long-term results and to take advantage of tax-deferral opportunities where available. This means avoiding constant tax payments on investments where possible.
Common options include a portfolio of mutual funds, pension plans, retirement accounts, and tax-advantaged savings plans. Each has distinct advantages and financial traits that suit different risk tolerances and time horizons.
120 rules for making your decisions
What do the numbers say about organizing investments by age? The enduring rule is to invest with a long horizon and to take on more risk when younger. This logic translates into portfolios that hold more growth-oriented assets earlier and gradually shift toward stability as time passes.
Typically, older investors allocate a larger share to fixed income, while younger investors can tolerate higher volatility and seek greater growth. A simple heuristic to gauge this balance is the 120 rule: subtract your age from 120 to estimate the percentage of stocks to own. This rule provides a rough risk framework aligned with life stage.
Investing is not easy, but it can help individuals reach future goals, especially in volatile times. Retirement plans and mutual funds often emerge as solid foundations for long-term wealth building [Industry Guidance].