The influence of the passage of time on your money is tremendously important. Depending on what you do with the money, time can become your ally or your worst enemy.
When we think about saving , at least in its initial phase, we usually focus on the objectives we want to achieve with that money and rarely on the means necessary to achieve it. However, misused, the results can be tremendously negative.
One of the factors that most influences a good or bad use of the money saved is the passage of time.
Time as the enemy of your money
If we immobilize our money, what is so famous about keeping money under the mattress , we can accumulate significant amounts over time. The problem is that money saved at home will have lost value over the years . This is a product of what we know as inflation .
Basically, this factor comes to tell us that if we have accumulated € 10,000 in 10 years, it is likely that at the end of saving we cannot buy the same things as at the beginning; Prices will have gone up . Where before you could buy a car with € 10,000 now you will need € 15,000, for example.
Inflation is the increase in the price of goods and services over time . From a technical point of view, we would say that it is the increase in the general price level that is represented, for example, in the consumer price index , CPI.
This index, is created from the price different products and services of the shopping cart, and, it comes to mark inflation at all times. For example, the CPI is compared from year to year to see the variation it has suffered. When prices increase it is known as inflation, if prices fall, what is called deflation occurs .
In good logic, when inflation rises, prices increase and the value of your money is lower . In other words, you can buy fewer things so your purchasing power decreases.
Inflation and your savings
When you save your goal it should be to obtain the highest possible return on savings . This is acquired through the profitability of the investment or the destination of the money . However, to really know the final profitability, that is, what your savings have earned, you should always subtract inflation.
There is a binomial that is infallible, the higher the interest rate, the greater the profit, but, in all likelihood, also inflation. Generally when interest rates are high, inflation is too . In short , the goal of your savings should always be at least to beat inflation . Otherwise, in fact, your money could not only not generate more money but also lose some of the capital, in addition to not obtaining added value.
In view of the above, it is easily understood that immobilizing savings is never a good idea , because, the passage of time is negative for idle money. The value of that money is devalued with inflation and over the years . Calculate the following, exaggerating a bit: from € 10,000 stored in your house facing the end of the year at an inflation of 3% will decrease your purchasing power by € 300. Even if you have the same amount your money will be worth less.
Time as an ally of your money
Given the above, it seems clear that we must do something with our money saved to try to beat inflation . Here we have different options, varied savings products, investment options and so on. From interesting products for the guaranteed and the absence of risk such as savings insurance , to more risky investments, for example participating in assets in the stock market. All these elements are legitimate options for your money to earn more money, but, the magic of the matter lies in something called compound interest .
When we talk about compound interest, we mean those interests that you are going to receive added to the capital that you have contributed to an investment , but also to the interests that are accumulating over the total result . That is to say, when we add the interest obtained to the capital that in turn generates interest again, which in turn added to the capital generates interest again … This is a snowball effect that causes sustained savings over time, However modest it may be, it can become a significant amount.
Time is the main ally of compound interest , it really is the fundamental key for it to work perfectly. Therefore, the sooner we start saving, the sooner our savings will grow and multiply .
Let’s put a simple example to see it clearer. If you invest € 1000 at 4% at the end of the year you will have obtained as a result € 40 of profitability, but, a new investment the following year at 4% is no longer calculated on the initial € 1000, but on the € 1040 of your savings. And so on.
The rule of 72
An interesting way to try to calculate how much time you should invest if you want to double the capital you are going to save is the so-called rule of 72.
This rule goes on to say that an investment is doubled over a period of years that results from dividing 72 by the interest you get on your investment . For example, following the example of a 4% investment, this rule would tell us that 72/4 = 18. Therefore, with an average return of 4%, in 18 years your capital had multiplied by two.