Hi there,

Welcome to Finance Friday. On Monday, we discussed delayed gratification and investing in your future self. In today’s newsletter, I want to discuss the major reason that we should all invest to build a stronger financial future: currency debasement.

Debasement and Your Future: Why Investing Makes Sense

What is Debasement of Currency?

Debasement refers to the erosion of a currency's value over time. How do we know that this is happening? We look at the value of assets like oil, gold, property and even collectables like art over time.

Debasement vs. Inflation

Inflation reflects a general increase in prices, but debasement focuses on the underlying value of the currency itself.

Here's the key difference: official inflation figures typically track a limited basket of goods and services. They do not capture the full picture, especially when it comes to asset price inflation.

Think about things like gold, oil, or property. Their prices often rise significantly alongside debasement, even if everyday items show a more moderate inflation rate.

As an example, when I started working, average house prices in the UK were approximately 3.5 times the average UK salary. In 2021 they were approximately 7 times (Source: The Nationwide Building Society).

To put it another way, house price inflation has been far greater than wage inflation. It stands to reason that this makes it much more difficult for young people, and couples, to buy their first house. We call this ‘getting on the property ladder’.

So, Why Invest?

Simply put, if you don't invest, your money's purchasing power weakens over time. Let's say you save 10,000€ today. Due to debasement, that same amount will almost certainly buy less in ten years.

Investing offers the potential to grow your money at a rate that outpaces debasement. This allows you to maintain, and even increase, your purchasing power in the future.

Is Investing for Everyone?

While investing is highly recommended, there are some situations where it is impossible or you should wait:

• Cost of Living Crisis: If you're struggling to meet basic needs, focus on budgeting and managing your finances before investing.

• High-Interest Debt: High-interest debt, like credit card debt, should be paid off first. Interest charges can quickly eat into potential investment returns.

• Emergency Fund: Before investing, build a safety net. Aim for 3-6 months' worth of living expenses as an emergency fund.

Remember: Investing involves risk. Consider your risk appetite before starting.

The Takeaway:

Debasement is a reality, and it highlights the importance of investing for your future. By strategically growing your money, you can ensure its buying power keeps pace with a changing world.

Next Steps:

Next week, we'll discuss different investment options and how to get started!

Word of the Day: Debasement

Debasement - noun - the action of reducing the quality or value of something

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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