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Inflation erodes the value of your savings. How best to arm yourself against it.
Inflation in Switzerland is currently at 1.3 per cent – and falling – which has eased prices somewhat; however, it means your wealth is constantly losing value. To compensate for this loss of purchasing power, you need one or more investments that generate solid returns.
You should keep some of your money in a savings account as a reserve – to cover unforeseen costs such as repairs or medical bills. What’s more, interest rates on savings have risen significantly of late – Migros Bank savers now get a rate of 1.4 per cent on their Bonus Savings Account. This means that the loss of purchasing power can now be fully compensated for – with a Bonus Savings Account at Migros Bank, you can earn a positive real rate of interest for the first time in a long time.
This is a just snapshot, however, and a longer-term analysis is needed to ensure your wealth preserves its value. If you want to effectively protect your wealth against inflation, you should be invested in the stock market alongside your savings account. Equities have the highest long-term return potential. That’s because the longer your investment horizon, the stronger the compound interest effect.
We know from experience that price fluctuations and associated falls in share prices are more than made up for over a longer period of time. In addition, the value of shares can rise during the course of inflation – namely when a company adapts to inflationary pressure and passes on the rising prices to customers. If the company maintains its profit margin, it still generates high profits. And the share price also benefits from this.
You can also add alternative investments such as gold or property to your portfolio to minimise the risk of losses; however, these asset classes are not suitable as your sole protection against inflation.
To combat inflation, in addition to financial investments, you should also look at potential day-to-day savings you could make, such as on housing costs or health insurance premiums. As wages have not risen to the same extent recently, there has been a noticeable loss in real earnings in these areas.
Angie Schweizer is a client advisor at Migros Bank and an investment expert.
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