What time does to your money

Time works in both directions at once, and both directions speed up with the years.

Inflation reduces what idle money can buy, even though the account balance never drops. Compound interest multiplies whatever is growing: what you earn stays inside and starts producing on its own.

How much purchasing power idle money loses

If your money doesn't grow at least as fast as prices, you lose purchasing power even though the balance doesn't drop a cent. It's a loss that appears on no bank statement, so you don't see it until you run the numbers.

The Spanish figure, with its date

Spain's CPI (consumer price index) for July 2026 came in at 3.6% annually. The INE (Spain's national statistics institute) published that figure on August 13, 2026.

Core inflation (the INE works it out by leaving energy products and unprocessed food out of the basket, the items that swing most from month to month) landed at 3.0%.

It isn't a stable number: the same INE reported an annual rate of 2.3% for January 2026, 3.4% for March and 3.2% for June. With swings like that, a single month doesn't say much.

What that 3.6% means in euros

Take €20,000 sitting in an account paying nothing.

At 3.6% a year, in twelve months that €20,000 will buy roughly what €19,305 buys today. The sum is 20,000 divided by 1.036. You've lost around €695 in purchasing power without spending a euro and without the balance moving.

Over five years, with that inflation sustained, that €20,000 would be equivalent to around €16,758 today: the same division by 1.036, once for each year. Some €3,242 less, without anyone spending it.

Why this doesn't mean "invest everything"

The previous session said the emergency cushion doesn't get invested, and that still holds: that money pays a small erosion in exchange for being available the day you need it.

An account paying 0% isn't free either: the cushion loses purchasing power there every year. And in the stock market (the marketplace where shares, which are slices of ownership in a company, get bought and sold) it can fall on the very day it's needed.

Both extremes cost something, and between them sit the intermediate options from the previous session.

Inflation isn't an argument for investing money you'll need soon. It's an argument for not leaving money idle that you don't need for twenty years.

The middle pot, which most people place badly

Between the cushion (which nobody touches) and long-term investment (not needed for years) there's a third pot: money with a date, three to seven years out. A house deposit, a car, a master's degree.

It's the most awkward case because both easy answers fail.

Leaving it in a 0% account for five years costs it, at July 2026's 3.6% inflation, around 16% of purchasing power: the €3,242 from the example above, on €20,000, is 16.2%.

Putting it in the stock market exposes it to a drop landing exactly the year you need it, which is precisely the sequence of returns risk from this chapter's first session: the fall landing on your date.

The closer the date and the less it can move, the less time there is to recover from a fall before the day arrives. A house deposit with a fixed date two years out looks more like the cushion than like an investment. A goal seven years out that you could postpone by a year tolerates considerably more.

Before choosing, answer this: "what happens if, on the day I need it, it's worth 20% less?" If the answer is "the whole plan collapses," the plan depends on a 20% fall not happening, and in the stock market those falls do happen.

How to calculate inflation's real effect

Real return is what you earn after subtracting inflation, and it's the only one that says anything.

A deposit at 3% with the 3.6% inflation the INE published for July 2026 isn't making you money: it's costing you 0.6% of purchasing power a year, with more euros in the account.

The subtraction almost nobody does

The quick version is to subtract: the nominal return (the percentage the product advertises, with nothing taken off) minus inflation. With a 5% return and that 3.6% inflation of July 2026, the real return is around 1.4%.

For precision the formula divides rather than subtracts: 1.05 divided by 1.036, minus 1, gives 1.35%. The gap against the 1.4% from the subtraction only shows up when the figures get large.

Any advertised return is nominal until you subtract inflation. A deposit "at 4%" in a country with 6% inflation loses purchasing power every year, however green the 4 looks on the poster.

The rule of 72, which works without a calculator

Divide 72 by an annual percentage and you get, approximately, the years it takes for that amount to double.

It works in both directions:

• In your favour: an investment at 6% a year doubles in about twelve years. At 9%, in eight.
• Against you: at the 3.6% inflation the INE published for July 2026, prices double in about twenty years. Meaning what costs €1,000 today will cost around €2,000 by the time someone who's forty now turns sixty.

It's an approximation, not an exact formula, but you can do it in your head and it gives the right scale, which is what goes missing when you decide to leave money idle "for now."

What compound interest is and how much it changes the result

Compound interest is earning interest on the interest you already earned, not just on the original amount. The difference against simple interest is small in the early years and enormous past a certain point, because it grows on itself.

The difference, with numbers

Ten thousand euros invested at 7% a year. That 7% is an assumption of this example, put there to keep the arithmetic round: no investment pays the same every year.

With simple interest, you collect €700 each year on the original €10,000. Over thirty years: €10,000 initial plus €21,000 in interest, totalling €31,000.

With compound interest, each year's 7% is calculated on the running total, interest included. Over thirty years the result passes €76,000: that's the €10,000 multiplied by 1.07 thirty times.

Same annual return, same starting amount, same period. Compound ends up at more than double simple: €76,000 against €31,000. All of that gap comes from interest generating its own interest.

Why the difference takes so long to show

In the first years, simple and compound run almost identically: at year five, the gap between the two examples above is a few hundred euros.

The separation starts showing around year ten and accelerates in the second half of the period. Most of what a thirty-year investment earns is generated in its last ten years.

Compound interest is boring exactly when you most need it to be motivating. In the years you're building the base you see almost nothing, and that's when people get tired and stop.

Compounding also works against you

Fees compound exactly like returns, only subtracting.

Go back to the example: €10,000 at 7% over thirty years gives a little over €76,000.

Now apply a 1.5% annual fee, which isn't an outrageous figure. ESMA, the European authority that supervises securities markets, measured between 2020 and 2024 an average total cost of 1.9% a year on equity funds sold to retail investors in the European Union.

And 1.38 of those 1.9 points are ongoing charges, which is the part comparable with the 1.5% here. Equity means shares.

With that 1.5% on top, the effective return drops from 7% to 5.5%, and the thirty-year result falls to around €50,000: the same €10,000 multiplied by 1.055 thirty times. Around €26,000 has gone, more than double the starting capital, for a 1.5% a year that looks insignificant on the product fact sheet.

That 1.5% isn't subtracted once: it's subtracted every year from a growing balance, so it compounds too.

That's why the entire next chapter is about costs. A small percentage repeated over decades decides a good part of the final outcome, and the fee, unlike the return, is one you can choose before you start.

Why starting earlier beats contributing more

Because compound interest needs time, and time is the one thing in this equation you can't buy later. Starting ten years earlier with less money usually beats starting ten years later with more.

The two cases, with numbers

Ana contributes €150 a month from age 25 to 35. Ten years, €18,000 contributed in total. At 35 she stops and never adds another euro.

Bruno starts at 35 and contributes €150 a month until 65. Thirty years, €54,000 contributed: three times Ana's total.

At that same 7% a year, compounding once a year and counting the contributions as €1,800 at the end of each year, by 65 Ana reaches around €189,000 and Bruno around €170,000. Ana finishes ahead on a third of what he put in.

Her €18,000 had between thirty and forty years to compound; Bruno's €54,000 had thirty at most, and much of it considerably less.

What this example does and doesn't prove

It does prove that early years are worth much more than late ones, and that delaying the start costs more than it looks.

It doesn't prove that Bruno made a fool of himself. He ended up with good money he wouldn't have had if he'd never started, and at 35 starting was still his best option.

The correct headline isn't "if you didn't start at 25, forget it." It's: the best time was ten years ago and the second best is now, and that sentence is arithmetic, not poster motivation.

Ana needed €150 spare a month at age 25, and not everyone has that.

We saw it in this chapter's first session: per the INE's 2025 Living Conditions Survey, 41.2% of people aged 16 to 29 can't pay a €650 unexpected expense out of their own money. Starting late isn't always a choice.

Your profile sheet, which closes the chapter

This whole chapter pointed at one thing: a sheet with five decisions written down, before there's money at stake. You'll read it the day the market falls 15% and you have to decide something.

1. What this money is for and when I need it. One goal per line, with its date. House deposit money and retirement money don't share a decision, even if they share an account.

2. My cushion is sorted. Yes or no, with the figure. Three to six months of essential expenses, available same-day: that three-to-six months is the convention personal finance guides repeat, not any authority's rule. If it's no, the four decisions below stay on paper, because the first surprise forces selling what's invested at the worst moment.

3. My expensive debt is sorted. Yes or no, with the interest rate. There's no official threshold: the reference is the interest you're paying, because paying down (returning what you owe ahead of schedule) saves you that interest for certain.

4. My risk capacity. The loss in euros my life absorbs without changing plans. It comes out of a sum: cushion, income and date.

5. My risk tolerance. The loss in euros I hold without selling out of nerves. It comes out of no sum at all, and usually lands below the previous one. In a real fall the lower of the two is the one that acts: capacity you can't stomach never gets used.

That last point comes out worst, because nobody truly knows their tolerance until they've tested it. Write it anyway: a number written down beforehand, even a rough one, beats improvising it in the middle of a fall.

What to remember

• With July 2026 CPI at 3.6%, per the INE, €20,000 sitting idle loses around €695 of purchasing power in a year without the balance dropping.
• Real return is nominal minus inflation, and it's the only one that says anything.
• Compounding is barely visible in the early years and decides the outcome in the last ones, which is why starting earlier beats contributing more.
• Fees compound the same way: 1.5% a year removed around €26,000 from a thirty-year example.
• Starting late isn't always a choice, and the best moment available is still now.

Milestone reached

That closes Chapter 2. You have your profile sheet filled in: what each pot of money is for, when you need it, whether your cushion and your debt are sorted, and how much you can lose by capacity and by tolerance. It's the course's first artifact, and what you'll measure every decision against from here on.

Chapter 3 returns to the market with a very practical question: what trading actually costs, and who you're trusting with your money.

Related: what "risk" really means · taxation of investing in Spain · why most people lose money investing