Why invest?
Investing is a crucial tool in our financial lives, as it allows us to make our savings profitable, protect ourselves from inflation, grow our money, and harness the power of compound interest. Likewise, it gives us the opportunity to obtain a better return than that offered by a traditional savings account, diversify our investments and create long-term wealth to meet our future financial goals and objectives, such as a house, travel, retirement , etc.
It is essential to understand that investing should be seen as a way to save and make our money work for us. Financial education plays a crucial role in this process, as it provides us with the necessary tools to make informed decisions and achieve our financial goals. For this reason, I believe that financial education should be a compulsory subject in schools and colleges, since money is part of our daily life, from the time we get up until we go to sleep, and even when we are sleeping, and it is necessary in each of the things we do, eat, health, dress, and most of the things we want to achieve.
Next, I will mention some reasons why I consider that the investment is fundamental in our financial life:
Inflation
Inflation is an economic phenomenon that causes a general increase in prices, which in turn decreases the purchasing power of currency and savings. In other words, we can buy fewer and fewer goods and services with the same amount of money. To counteract this situation, investment becomes a fundamental tool to combat inflation, since it allows generating returns that exceed the inflation rate and thus ensuring that our money maintains its purchasing value. A wage increase may be temporarily positive, but no matter how much wages rise, inflation will do the same or to a greater extent and constantly, ending up reducing our purchasing power. If historical inflation on average has been 3%, and our salaries rise by 2%, it means that we are losing purchasing power by 1%.
Currently, many countries around the world are experiencing double-digit inflation, further exacerbating the problem. This phenomenon is especially evident in the context of the 2020 health crisis, where governments have increased the money supply and, as a result, widespread inflation has occurred. To control it, central banks have had to raise interest rates, which in turn can lead to a contraction of the economy. In the near term, central banks are expected to cut rates to return to historical inflation levels. In any case, it is clear that investment is a key tool to protect our savings and face inflation. Read more about inflation in the blog
Pensions
Pensions are destined to disappear in Spain, or they will simply be so ridiculous, that within a few years, retirees will not be able to cover their basic needs.
Spain's pension distribution system is a pyramidal system, this means that people who are currently contributing pay the pensions of current retirees. Let's imagine a pyramid where at its base are the people who contribute and at the top are the retired people. This sounds wonderful when there are more people making contributions than those who are in retirement, the problem is that this pyramid is being reversed and there are more and more retirees than people making contributions, and yes, in the past for every 5 workers making contributions, there was a retiree, today there are 2 workers for every retiree, and it is expected that by 2050 this proportion will get even worse, eventually inverting the pyramid. This situation is alarming, and could lead to the bankruptcy of the pension system in Spain if drastic measures are not taken to prevent it.
It is also important to consider that 90% of the monetary funds, supposedly destined to guarantee the payment of future pensions, are invested in fixed income from the Spanish treasury. The problem with this is that a default on the Spanish debt would mean the bankruptcy of the pension system. Honestly, it would be crazy to think of investing 90% of a person's capital destined for retirement in Spanish fixed income. For many investors, such a decision would mean losing their jobs.
Make our savings profitable
By investing our money, we can obtain a higher return than that offered by a traditional savings account. Keeping our money in the bank or under the mattress is not the best option. The interest rate that banks offer for money deposited at a fixed term is very low, which translates into a loss of real value for the saver due to inflation. If a bank gives us 1% for our deposit and inflation is 3%, we are losing 2% of our money every year from having that money in the bank. In addition, if we need to cancel our account early, the commissions to be paid can further deplete our capital, and the availability of our money will be limited. For all this, the bank is not the best place to keep our money safe and earning returns.
Diversification
By investing in different options, such as stocks, investment funds, real estate, among others, we can reduce the risk of loss and increase the chances of profit. Diversification allows us to spread our money across different investment options, allowing us to minimize the risk of loss and maximize the chances of profit.
Compound interest
Compound interest allows us to grow our capital exponentially over time, since the interest generated is reinvested and generates new interest. This allows us to achieve our long-term financial goals efficiently. Compound interest is one of the key pieces in investment.
No doubt there will be many more reasons on this matter, but in general terms, these reasons are a clear example of why investing our money plays an important role in our finances.