As an economically responsible adult, you’re always thinking about setting aside some of your earnings in order to save up for future expenses. Most commonly, these expenses include college education for your kids, your own house, or your eventual retirement. In life, things don’t always turn out as planned though – you could also need some money for bridging a short-term emergency. 

Now that it’s back to school season once again, you might want to use this opportunity to think about your personal finances and prepare for the future.

We live in a time of economic turmoil, making planning for the future difficult. With central banks around the world printing unprecedented amounts of fiat money, the value of your cash holdings could depreciate at a rapid pace. In order to protect your life savings from this inflation, you may have to invest them for a profit or to diversify your portfolio.

A decade ago, you were able to simply deposit your money at a bank, allowing the bank to reinvest your money and reward you with a share of the interest rate they are taking in. Due to low or even sometimes negative interest rates, this is not an option to protect your savings from inflation anymore. As long as the inflation rate is higher than the interest rate your bank is offering, the net worth of your money decreases over time. In order to protect your holdings, you could therefore seek out more profit-bearing assets. 

For many people, times of financial change are the perfect moment to rethink their personal finances and make strategic decisions about where to invest their capital. As such, Gen Z might just be the first generation in history who at a very young age learns that, in order to have a sound retirement plan, they will need to take charge of their own finances. At the same time, they are the first generation native to the situation after the 2007/08 financial crisis and the alternative economic system that emerged out of this situation through Bitcoin and other cryptocurrencies. Therefore, today’s young adults are the most knowledgeable for crypto and blockchain technology and they are the most willing to accept this technology as part of their financial planning.

Stocks have been the preferred instrument for private investors for a long time as well as real estate and gold. It’s important to keep diversification in mind, since all of these asset classes can lose some of their value due to market fluctuations.

The nature of investments is that returns are always correlated with risks. When determining where to allocate your savings, the primary goal could be to optimise for the best possible return, while maintaining a reasonable risk profile. Diversification can decrease your risk by splitting your holdings up to multiple asset classes. That way, if one of your assets loses value on their respective market, your losses are cushioned by your other holdings. Ideally, diversification means buying assets that are uncorrelated to each other, as correlated assets often move their prices into the same direction. 

For example, stock prices are known to be highly correlated, meaning that if one stock loses value, others are likely to do so too. Therefore, buying into other asset classes in addition to stocks is considered better diversification than putting everything merely into different stocks.

In light of diversification, you could also consider buying digital assets, also known as cryptocurrencies. The benefit is that cryptocurrencies are generally regarded as uncorrelated to other asset classes. Furthermore, crypto is still a growing market with lots of opportunities to turn a profit. 

In contrast to fiat money, which can be inflated in an unlimited fashion, the inflation rate of most cryptocurrencies is fixed. Some cryptocurrencies like Bitcoin also have a limited total supply – more than 21 million Bitcoins will never exist. Furthermore, cryptocurrencies are decentralized, meaning there’s not a single person, group, company or entity in charge. This makes them highly resilient against outside interference and censorship-resistant. All of this makes digital assets a wonderful tool for portfolio diversification.

There are several options available in terms of buying crypto. The most important is to do your own research on which crypto you want to invest in and to educate yourself beforehand. Most coins serve different projects or economic functions within the crypto space, so it could be interesting to split up your crypto holdings into multiple currencies. No matter your choice, you have to be informed before doing anything and make an educated choice. 

Thanks to crypto and blockchain technology, there are also new options to invest your money in ways that most people don’t even know about. While simply buying and holding digital assets is a valid way to protect your money from inflation, there are options that let you earn some passive income on top of that. 

Some cryptocurrencies are secured by a Proof of Stake (PoS) consensus mechanism. This means that owners can “stake” their coins and thus participate in the transaction validation process. To summarize, staking, whether on your own or with the help of a service provider, lets you earn an annual percentage revenue (APR) on the cryptocurrency you stake. 

Instead of just holding, staking, or waiting for your coins to increase in price, you could also profit from their volatility by trading. These are investments made over shorter time periods in the hope of making quick profits and can take seconds, minutes, days or even a few months. To maximize your chances, you have to pay attention to a lot of criteria before and during your investment in order to effectively bet on a good horse and sell it at the proper time. Be aware of the risks of trading and always educate yourself and do your own research before doing anything.

Lastly, Decentralized Finance (DeFi) is an emerging and growing field in the blockchain space, which you can also use to earn a passive income. By far the largest sector in DeFi is peer to peer lending. On these platforms, crypto owners can use their coins as collateral in order to take out a loan provided by other users. 

The process for earning a passive income through DeFi lending is simple: you send money into a smart contract that automatically gives out loans to anyone who is willing to collateralize this loan with cryptocurrency. As with all loans, the borrowers have to pay an interest rate to the lenders. Thanks to this collateral, you are never at risk of a loan default as a lender. 

Whether or not you prefer HODLing, trading, staking, or lending, when you put some of your life savings into crypto, you should educate yourself and think about different investment opportunities. Lastly, do not forget that there are other investments outside of the blockchain sector, such as rare metals, stocks, and real estate.

The content you are reading is for informational purposes only. Nothing contained in this article constitutes a solicitation or recommendation to buy or sell crypto-assets in this or in any other jurisdiction in which such solicitation could be unlawful under the laws of the country.  

Before using the services, please educate yourself to make informed decisions. Crypto assets are volatile. Carefully evaluate your goals and the financial risk you are willing to take. Please be aware that Ledger does not provide financial, tax, or legal advice. Decisions to perform operations involving crypto assets should be taken on your own or rely on opinions of reliable and qualified experts.

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