Can I make my savings keep in check with or beat inflation over a long time period via index funds?
"Question 2 Some financial institutions can provide a way to invest small amounts with low or no cost fees over a period of time (like monthly, weekly, etc).  For instance, a few brokerages have a way to buy specific ETFs for no cost (outside of the total expense ratio). Question 3 When someone says that investing is like buying a lottery ticket, they are comparing an event that almost always has at least a 99.9% of no return (large winnings) to an event that has much better odds.  Even if I randomly pick a stock in the S&P 500 and solely invest in it, over the course of a given year, I do not face a 99.9% chance of losing everything. So comparing the stock market to a lottery, unless a specific lottery has much better odds (keep in mind that some of these jackpots have a 99.9999999% of no return) is not the same.  Unfortunately, nothing truly safe exists - risk may mutate, but it's always present; instead, the probability of something being safe and (or) generating a return may be true for a given period of time, while in another given period of time, may become untrue. One may argue that holding cash is safer than buying an index fund (or stock, ETF, mutual fund, etc), and financially that may be true over a given period of time (for instance, the USD beat the SPY for the year of 2008).  Benjamin Franklin, per a biography I'm reading, argued that the stock market was superior to gold (from the context, it sounds like the cash of his day) because of what the stock market represents: essentially you're betting on the economic output of workers.  It's like saying, in an example using oil, that I believe that even though oil becomes a rare resource in the long run, human workers will find an alternative to oil and will lead to better living standards for all of us. Do civilizations like the Mongolian, Roman, and Ottoman empires collapse?  Yes, and would holding the market in those days fail?  Yes.  But cash and gold might be useless too because we would still need someone to exchange goods with and we would need to have the correct resources to do so (if everyone in a city owns gold, gold has little value).  The only ""safe bet"" in those days would be farming skill, land, crops and (or) livestock because even without trading, one could still provide some basic necessities." "While nothing is guaranteed - any stock market or country could collapse tomorrow - if you have a fairly long window (15+ years is certainly long), ETFs are likely to earn you well above inflation.  Looking at long term ETFs, you typically see close to 10% annual growth over almost any ten year period in the US, and while I don't know European indexes, they're probably well above inflation at least. The downside of ETFs is that your money is somewhat less liquid than in a savings account, and any given year you might not earn anything - you easily could lose money in a particular year.  As such, you shouldn't have money in ETFs that you expect to use in the next few months or year or even a few years, perhaps. But as long as you're willing to play the long game - ie, invest in ETF, don't touch it for 15 years except to reinvest the dividends - as long as you go with someone like Vanguard, and use a very low expense ratio fund (mine are 0.06% and 0.10%, I believe), you are likely in the long term to come out ahead.  You can diversify your holdings - hold 10% to 20% in bond funds, for example - if you're concerned about risk; look at how some of the ""Target"" retirement funds allocate their investments to see how diversification can work [Target retirement funds assume high risk tolerance far out and then as the age grows the risk tolerance drops; don't invest in them, but it can be a good example of how to do it.]   All of this does require a tolerance of risk, though, and you have to be able to not touch your funds even if they go down - studies have repeatedly shown that trying to time the market is a net loss for most people, and the best thing you can do when your (diverse) investments go down is stay neutral (talking about large funds here and not individual stocks). I think this answers 3 and 4.   For 1, share price AND quantity matter (assuming no splits).  This depends somewhat on the fund; but at minimum, funds must dividend to you what they receive as dividends.  There are Dividend focused ETFs, which are an interesting topic in themselves; but a regular ETF doesn't usually have all that large of dividends.  For more information, investopedia has an article on the subject.  Note that there are also capital gains distributions, which are typically distributed to help offset capital gains taxes that may occur from time to time with an ETF.  Those aren't really returns - you may have to hand most or all over to the IRS - so don't consider distributions the same way. The share price tracks the total net asset value of the fund divided by the number of shares (roughly, assuming no supply/demand split).  This should go up as the stocks the ETF owns go up; overall, this is (for non-dividend ETFs) more often the larger volatility both up and down. For Vanguard's S&P500 ETF which you can see here, there were about $3.50 in dividends over 2014, which works out to about a 2% return ($185-$190 share price).  On the other hand, the share price went from around $168 at the beginning of 2014 to $190 at the end of 2014, for a return of 13%.   That was during a 'good' year for the market, of course; there will be years where you get 2-3% in dividends and lose money; in 2011 it opened at 116 and closed the year at 115 (I don't have the dividend for that year; certainly lower than 3.5% I'd think, but likely nonzero.) The one caveat here is that you do have stock splits, where they cut the price (say) in half and give you double the shares.  That of course is revenue neutral - you have the same value the day after the split as before, net of market movements. All of this is good from a tax point of view, by the way; changes in price don't hit you until you sell the stock/fund (unless the fund has some capital gains), while dividends and distributions do.  ETFs are seen as 'tax-friendly' for this reason. For 2, Vanguard is pretty good about this (in the US); I wouldn't necessarily invest monthly, but quarterly shouldn't be a problem.  Just pay attention to the fees and figure out what the optimal frequency is (ie, assuming 10% return, what is your break even point).  You would want to have some liquid assets anyway, so allow that liquid amount to rise over the quarter, then invest what you don't immediately see a need to use. You can see here Vanguard in the US has no fees for buying shares, but has a minimum of one share; so if you're buying their S&P500 (VOO), you'd need to wait until you had $200 or so to invest in order to invest additional funds." "If I invest in index funds or other long term stocks that pay dividend which I reinvest, they don't need to be worth more per share for me to make a profit, right? That is, if I sell part of the stocks, it's GOOD if they're worth more than I bought them at, but the real money comes from the QUANTITY of stocks that you get by reinvesting your dividends, right? I would say it is more the other way around.  It is nice to get dividends and reinvest them, but overall the main gain comes from the stocks going up in value. The idea with index funds, however, is that you don't rely on any particular stock going up in value; instead you just rely on the aggregate of all the funds in the index going up.  By buying lots of stocks bundled in an index fund, you avoid being too reliant on any one company's performance. Can I invest ""small amounts"" (part of paycheck) into index funds on a monthly basis, like €500, without taking major ""transaction fees""? (Likely to be index fund specific... general answers or specific answers using popular stocks welcomed). Yes, you can.  At least in the US, whether you can do this automatically from your paycheck depends on whether you employer has that set up.  I don't know that work in the Netherlands.  However, at the least, you can almost certainly set up an auto-invest program that takes $X out of your bank account every month and buys shares of some index fund(s). Is this plan market-crash proof? My parents keep saying that ""Look at 2008 and think about what such a thing would do to your plan"", and I just see that it will be a setback, but ultimately irrelevant, unless it happens when I need the money. And even then I'm wondering whether I'll really need ALL of my money in one go. Doesn't the index fund go back up eventually? Does a crash even matter if you plan on holding stocks for 10 or more years? Crashes always matter, because as you say, there's always the possibility that the crash will occur at a time you need the money.  In general, it is historically true that the market recovers after crashes, so yes, if you have the financial and psychological fortitude to not pull your money out during the crash, and to ride it out, your net worth will probably go back up after a rough interlude.  No one can predict the future, so it's possible for some unprecedented crisis to cause an unprecedented crash.  However, the interconnectedness of stock markets and financial systems around the world is now so great that, were such a no-return crash to occur, it would probably be accompanied by the total collapse of the whole economic system.  In other words, if the stock market dies suddenly once and for all, the entire way of life of ""developed countries"" will probably die with it.  As long as you live in such a society, you can't really avoid ""gambling"" that it will continue to exist, so gambling on there not being a cataclysmic market crash isn't much more of a gamble. Does what I'm planning have similarities with some financial concept or product (to allow me to research better by looking at the risks of that concept/product)? Maybe like a mortgage investment plan without the bank eating your money in between? I'm not sure what you mean by ""what you're planning"".  The main financial products relevant to what you're describing are index funds (which you already mentioned) and index ETFs (which are basically similar with regard to the questions you're asking here).  As far as concepts, the philosophy of buying low-fee index funds, holding them for a long time, and not selling during crashes, is essentially that espoused by Jack Bogle (not quite the inventor of the index fund, but more or less its spiritual father) and the community of ""Bogleheads"" that has formed around his ideas.  There is a Bogleheads wiki with lots of information about the details of this approach to investing.  If this strategy appeals to you, you may find it useful to read through some of the pages on that site." For your base question, yes.  (Barring some major collapse-of-civilization event, but in that case you're screwed anyway :-))  On the individual points: 1) Depends on whether you choose to invest in index-type funds (where profit is mainly expected from price appreciation), or more value-based investing.  But either or a mix of the two (my own choice) should show returns above inflation, over the long term. 2) Yes, in the US anyway.  You can invest a few hundred dollars at a time, and (with good companies like Vanguard & T. Rowe Price) there are no transaction fees, either for investing or for redeeming.   3) Long-term, it's crash-proof IF you have the self-discipline not to panic-sell at market lows.  In my case, my total fund valuation dropped around 40% in '08.  I didn't sell anything (and in fact tried to cut spending and invest more), and now I have nearly double what I had before the crash. Bottom line is that it has worked for me.  After ~30 years of investing this way without being fanatic about it, I have enough that I could live moderately without working for the rest of my life.  Not - and this is where I part company with MMM and most of the FIRE community - that I'd ever want to actually retire.  But my modest financial independence gives me the freedom to work at things I like, rather than because I'm worrying about paying bills. See the following information: http://www.bogleheads.org/wiki/Treasury_Inflation_Protected_Security You can buy individual bonds or you can purchase many of them together as a mutual fund or ETF. These bonds are designed to keep pace with inflation.  Buying individual inflation-protected US government bonds is about as safe as you can get in the investment world. The mutual fund or ETF approach exposes you to interest rate risk - the fund's value can (and sometimes does) drop. Its value can also increase if interest rates fall.
Inflation will hurt your landlord, but it won't hurt you. In either case, you have to pay 7200, regardless of how much inflation has increased over two years.  However, they are not equivalent to you. If you take the monthly payment, then you can potentially come out ahead. If you were to take the 7200 and put it in a savings account and just pay monthly then you'll be earning interest that you wouldn't get if you paid up front.  There's a whole lot of other investment options you could go with too, but that's another question. The risk here is that if you go through financial hardship you may be tempted to draw on that 7200 early and come up short for rent one month. "short answer:  any long term financial planning (~10yrs+). e.g. mortgage and retirement planning.  long answer: inflation doesn't really matter in short time frames. on any given day, you might get a rent hike, or a raise, or the grocery store might have a sale.  inflation is really only relevant over the long term.  annual inflation is tiny (2~4%) compared to large unexpected expenses(5-10%).  however, over 10 years, even your ""large unexpected expenses"" will still average out to a small fraction of your spending (5~10%) compared to the impact of compounded inflation (30~40%). inflation is really critical when you are trying to plan for retirement, which you should start doing when you get your first job.  when making long-term projections, you need to consider not only your expected nominal rate of investment return (e.g. 7%) but also subtract the expected rate of inflation (e.g. 3%). alternatively, you can add the inflation rate to your projected spending (being sure to compound year-over-year). when projecting your income 10+ years out, you can use inflation to estimate your annual raises.  up to age 30, people tend to get raises that exceed inflation. thereafter, they tend to track inflation. if you ever decide to buy a house, you need to consider the impact of inflation when calculating the total cost over a 30-yr mortgage. generally, you can expect your house to appreciate over 30 years in line with inflation (possibly more in an urban area). so a simple mortgage projection needs to account for interest, inflation, maintenance, insurance and closing costs. you could also consider inflation for things like rent and income, but only over several years. generally, rent and income are such large amounts of money it is worth your time to research specific alternatives rather than just guessing what market rates are this year based on average inflation. while it is true that rent and wages go up in line with inflation in the long run, you can make a lot of money in the short run if you keep an eye on market rates every year. over 10-20 years your personal rate of inflation should be very close to the average rate when you consider all your spending (housing, food, energy, clothing, etc.)." More importantly, index funds are denominated in specific currencies. You can't buy or sell an index, so it can be dimensionless. Anything you actually do to track the index involves real amounts of real money. "Yes... but it is a matter of balancing risks.  It is wiser to keep a small amount of ""ready cash"" as an emergency/buffer -- and to suffer the gradual loss to inflation...  Than it is risk becoming ""stuck"" in an emergency with zero dollars in any (low or no cost) source of funds -- those kinds of ""emergencies"" ($500 or $1,000 ""unexpected/unbudgeted"" expenses) are fairly frequent and virtually inevitable.  You lose vastly MORE money when you are forced to borrow those amounts (interest -- even **low-rate** loans -- is virtually always higher than the average inflation rate)." "Hope springs eternal in the human breast. No actively managed fund has beaten the indices over a long period of time, but over shorter periods, actively managed funds have beaten the indices quite often, sometimes quite spectacularly, and sometimes even for many years in a row. Examples from the past include Fidelity Magellan and Legg Mason Value Trust. So people buy actively managed funds hoping to cash in on such  good performance. The difficulty is, of course, that many people don't even think about investing in a fund until it is listed in some ""Top Forty Funds of last year"" compilation, and for many funds, they have already peaked, and new buyers are often disappointed.  Some  people who invested earlier plan on getting out of the fund before  the fund falls flat on its face, and fewer even succeed in doing so. As to why 401k plans often have high-cost actively managed funds, there are several reasons. A most important one is that there are numerous companies that act as administrators of 401k programs and these companies put together package deals of 401k programs (funds, administrative costs etc), and small employers perforce have to choose from one of these packages.  Second, there are various rules that have come into existence since the first days of 401k (and 403b) programs such as the investment choices must include funds of different types, and actively managed funds (large cap, small cap etc) are one of the choices that must be offered. Gone are the days when the only choice was a variable annuity offered by the insurance company administering the 401k program. Finally, program participants also have hopes (cf. opening sentence) and used to demand that the 401k program offer a few actively managed funds, not just index funds." "Even if the price of your home did match inflation or better — and that's a question I'll let the other answers address — I propose that owning a home, by itself, is not a sufficient hedge against inflation. Consider: Inflation will inflate your living expenses. If you're lucky, they'll inflate at the average. If you're unlucky, a change in your spending patterns (perhaps age-related) could result in your expenses rising faster than inflation. (Look at the sub-indexes of the CPI.) Without income also rising with inflation (or better), how will you cope with rising living expenses? Each passing year, advancing living expenses risk eclipsing a static income. Your home is an illiquid asset. Generally speaking, it neither generates income for you, nor can you sell only a portion. At best, owning your principal residence helps you avoid a rent expense and inflation in rents — but rent is only one of many living expenses. Some consider a reverse-mortgage an option to tap home equity, but it has a high cost. In other words: If you don't want to be forced to liquidate [sell] your home, you'll also need to look at ways to ensure your income sources rise with inflation. i.e. look at your cash flow, not just your net worth. Hence: investing in housing, as in your own principal residence, is not an adequate hedge against inflation. If you owned additional properties to generate rental income, and you retained pricing power so you could increase the rent charged at least in line with inflation, your situation would be somewhat improved — except you would, perhaps, be adopting another problem: Too high a concentration in a single asset class. Consequently, I would look at ways other than housing to hedge against inflation. Consider other kinds of investments. ""Safe as houses"" may be a cliché, but it is no guarantee." If you're worried about investing all at once, you can deploy your starting chunk of cash gradually by investing a bit of it each month, quarter, etc. (dollar-cost averaging).  The financial merits and demerits of this have been debated, but it is unlikely to lose you a lot of money, and if it has the psychological benefit of inducing you to invest, it can be worth it even if it results in slightly less-than-optimal gains. More generally, you are right with what you say at the end of your question: in the long run, when you start won't matter, as long as you continue to invest regularly.  The Boglehead-style index-fund-based theory is basically that, yes, you might save money by investing at certain times, but in practice it's almost impossible to know when those times are, so the better choice is to just keep investing no matter what.  If you do this, you will eventually invest at high and low points, so the ups and downs will be moderated. Also, note that from this perspective, your example of investing in 2007 is incorrect.  It's true that a person who put money in 2007, and then sat back and did nothing, would have barely broken even by now.  But a person who started to invest in 2007, and continued to invest throughout the economic downturn, would in fact reap substantial rewards due to continued investing throughout the post-2007 lows.  (Happily, I speak from experience on this point!) "Suppose you have $100 today and suppose that hamburgers cost $5. If you are holding $100, you could buy 20 hamburgers at $5 each. Now suppose you take that $100 and stuff it under your mattress for 24 years. When you pull out your money, you still have $100, but it turns out hamburgers now cost $10.   The increase from $5 to $10 is inflation.   Your savings of $100 was ""eroded"" by half even though before and after you had $100 and now you can only buy 10 hamburgers instead of 20 hamburgers. Suppose inflation is 3%.   That means that if you earn 3% return on your investments, you'll stay even with inflation (If you can buy 20 hamburgers today, then at any point you can still buy 20 hamburgers).   If you want your money to grow in a real, tangible way you'll want to seek returns that beat the rate of inflation." You can't both enforce saving and have access to the money -- from what you say, it's clear that if you can access the money you will spend it. Can you find an account that allows one withdrawal every six months but no more, which should help to cut down on the impulse buys but still let you get at your money in an emergency? My suggestion is that you speak with a financial adviser that specializes in Islamic investing. For the long term there are Islam approved mutual funds that only invest in non-banking organizations, and I would assume there are more conservative options for the short term as well (3-4 years). Although you may not feel the effects of inflation all that much in just a few years, it would still be beneficial to utilize programs that allow you to earn a return on your money. (I may not have said that for $2,500 but for $25,000 I think it's worth looking into.) Also, some scholars suggest that it is even allowed to invest in mutual funds that deal with banks, as long as you calculate the portion of your return that came from the bank charging interest, and donate that amount to charity. In a word, yes. You can buy very low cost index ETFs, like VTI, VEA, BND, FBND and rebalance in proportion to your age and risk tolerance. Minimal management and low cost. Yes, in 2 ways: As you mention, the price of a home generally grows with inflation - along with other factors (supply and demand in local markets, etc.). Through financing. If you finance 80% of your purchase today, in 2014 dollars, you will pay back in future dollars. Those future dollars are worth less, because of inflation. "There are no guarantees in the stock market. The index fund can send you a prospectus which shows what their results have been over the past decade or so, or you can find that info on line, but ""past results are not a guarantee of future performance"". Returns and risk generally trade off against each other; trying for higher than average results requires accepting higher than usual risk, and you need to decide which types of investments, in what mix, balance those in a way you are comfortable with. Reinvested dividends are exactly the same concept as compounded interest in a bank account. That is, you get the chance to earn interest on the interest, and then interest on the interest on the interest; it's a (slow) exponential growth curve, not just linear. Note that this applies to any reinvestment of gains, not just automatic reinvestment back into the same fund -- but automatic reinvestment is very convenient as a default. This is separate from increase in value due to growth in value of the companies. Yes, you will get a yearly report with the results, including the numbers needed for your tax return. You will owe income tax on any dividends or sales of shares. Unless the fund is inside a 401k or IRA, it's just normal property and you can sell or buy shares at any time and in any amount. Of course the advantage of investing through those special retirement accounts is advantageous tax treatment, which is why they have penalties if you use the money before retirement. Re predicting results: Guesswork and rule of thumb and hope that past trends continue a bit longer. Really the right answer is not to try to predict precise numbers, but to make a moderately conservative guess, hope you do at least that well, and be delighted if you do better... And to understand that you can lose value, and that losses often correct themselves if you can avoid having to sell until prices have recovered. You can, of course, compute historical results exactly, since you know how much you put in when, how much you took out when, and how much is in the account now. You can either look at how rate of return varied over time, or just compute an average rate of return; both approaches can be useful when trying to compare one fund against another... I get an approximate version of this reported by my financial management software, but mostly ignore it except for amusement and to reassure myself that things are behaving approximately as expected. (As long as I'm outperforming what I need to hit my retirement goals, I'm happy enough and unwilling to spend much more time on it... and my plans were based on fairly conservative assumptions.) If you invest $3k, it grows at whatever rate it grows, and ten years later you have $3k+X. If you then invest another $10k, you now have $3k+X+10k, all of which grows at whatever rate the fund now grows. When you go to sell shares or fractional shares, your profit has to be calculated based on when those specific shares were purchased and how much you paid for them versus when they were sold and how much you sold them for; this is a more annoying bit of record keeping and accounting than just reporting bank account interest, but many/most brokerages and investment banks will now do that work for you and report it at the end of the year for your taxes, as I mentioned." Huh? I don't see how this effects inflation in practice.... (only in theory)  Basically, I sell short end bonds and buy longer end bonds pocketing the difference in yield and increasing my duration.  GLD and mining are hedges against inflation, markets are stupidly short term looking and care only about current expectations, if the current macro situation deteoriates we see prices fall. Store cards also tend to have a fairly low credit limit so depending on how much money you spend on the card, your credit utilisation might be a lot higher than desirable.