Although the question I am posing in this article may seem a bit absurd, it really is not at all. In the first place, it is necessary to bear in mind that the value of the money saved is not constant, but the value of the money saved varies with the passage of time.
One million pesetas from 30 years ago is not worth the same as the current equivalent of 6.000 euros. Why is it important to keep this in mind? Because being aware of this fact leads us to look for a way to conserve and increase the value of our savings over time. The objective of this article is to try to make savers aware of the importance of maximizing the future value of our savings.
What does the value of our savings depend on?
The value of our savings depends on two variables:
- The profitability of our savings
- Loss of purchasing power due to inflation.
On the one hand, our savings will gain value if it is invested correctly. On the other, you will lose purchasing power due to the increase in the cost of living. Since the loss of purchasing power is beyond our influence, the only thing we can do to increase the value of our savings is to increase profitability, and the only way to increase the profitability of our savings is to invest our money wisely.
Example of the future value of our savings
Starting from a saving of € 10.000 and an average annual inflation of 2% for the next few years. We will calculate the value of these savings in 25 years, taking into account different returns. To do this, we will first calculate its nominal profitability, the loss of purchasing power and finally its real value.
The loss of purchasing value of 2% per year compounded for 25 years, has the consequence that the money retains only 60,95% of its value.
In the following table you can see the nominal value and the value of the savings with different returns over a period of 25 years. The real value is calculated using the loss of purchasing value caused by inflation.
|Nominal value||33.863 €||60.983 €||108.347 €||190.026 €||329.189 €||563.568 €||953.962 €|
|Real value||20. 640 €||37.171 €||66.040 €||115.826 €||200.651 €||343.512 €||581.469 €|
These results can also be seen in the following graph.
Savings value graph
What should we do as savers?
A change in the mindset of the average saver is important. Many people act as if money conserves its value, saving in oblivion to reality, while their money gradually loses purchasing value.
The saver's objective should be to seek investments to increase the profitability of the money that costs so much to save. Only in this way can you increase the real value of your savings in the long term and increase your financial freedom.