Investing: why and where to invest your money

In life as in business, you have four ways to grow your money:

1. Earn more.
2. Reduce your expenses.
3. Put your money to work. In other words, invest or speculate.
4. Protect it.

That's it. There are no others.

In my experience, the first route is the most powerful, but it comes at the cost of your time.

Starting with the second is a great idea if your money management is, let's say, “messy”. It takes less effort than the previous one and you see results almost from day one. But there is a floor you cannot go below without getting dangerously close to living like you're in the developing world.

The third, however, is the most comfortable. Especially if you already have some capital or a certain amount you can invest every month. Because thanks to that, you won't need to devote much time or effort to earning returns.. 

That said, this is not short term—that would be trading and I'm not going to talk about that here—but rather a time horizon measured in years. Five at a minimum. Ten is better. And staying invested for your whole life is the scenario you should really be considering.

With that idea in mind, I want to explain exactly what investing is, where you can invest and how to do it.

To do that, I've created a series of articles covering this topic, designed to be read in order, with the first instalment being the one you're reading now.

The aim isn't to turn you into some mega-expert—it would be naive for both you and me to expect that from seven articles—but to teach you the minimum I think everyone should know about investing.

Even if you're starting from scratch, you'll see that it's much simpler than you probably had in mind..

Here are all the linked articles. I'm fairly sure that if you read them all, your mindset will change quite a bit:

1. Investing from scratch: where to invest your money. (That's the one you're reading now).
2. Types of assets you can invest in according to their role in your portfolio.
3. How to buy assets: investment vehicles.
4. Investment platforms: where to buy investment vehicles or assets.
5. Investment risks and safeguards.
6. My investment system.
7. Wealth: how to grow it, protect it and pass it on.

And the extras:

1. How to start investing: the essential steps.
2. When to start investing.
3. How to make extra money.
4. How to save money.

What investing is

Investing is simply putting your money to work so it can grow or generate income for you over time.  

The problem isn't that it's difficult, but that hardly anyone has explained it to us properly, given the level of knowledge about money management in our country. Yes, we are financially illiterate for the most part.

And the people who aren't, because it's their job, often explain things with too much jargon or by mixing concepts that an ordinary person can't follow.

Still, it's simpler than it looks. And once you arrange it properly in your head, everything fits together.

Why you need to invest

Contrary to what you might think, it isn't to get rich (it's not that easy, even if you invest). The main reason is something else: inflation and the growth of the money supply in circulation.

Although compound interest and time are on our side.

Inflation

Inflation is the general increase in prices over time..

Put simply: with the same amount of money, you can buy fewer things than before.

For example, today a coffee costs €1.50 and in a few years it costs €2. That's inflation. Your money hasn't changed, but its value has, because it has lost purchasing power.

Inflation doesn't mean one specific product goes up in price; it means many prices rise together: food, housing, transport, services, and so on.

And bear in mind that inflation is actively encouraged. Governments are comfortable with moderate inflation of around 2%, which makes their sovereign debt worth less.  

The problem is that, on top of that, actual levels over many periods aren't 2% but more like 5% or 6%, with the corresponding erosion of your purchasing power.

That's why investing matters: if your money doesn't grow at least as fast as inflation, in practice you're losing purchasing power, even if the number in your account doesn't change.

M2, or growth in the money supply

By the way, inflation can arise automatically when energy or housing becomes more expensive, but it can also be created actively when the amount of money in circulation increases: central banks and governments print money without any real backing behind it..

This is a major problem in today's economy and with fiat money.

And don't think it grows by 2% or 3% like inflation. Not even close: we're talking about 6%, with peaks above 20% in 2021 during the pandemic.

This means that, if there are the same number of goods in the world but 6% more money to buy them, the result is that you are 6% poorer..

Yes, just like that.

Fortunately, there are other reasons to invest that work in our favour.

Compound interest

Compound interest is simply making money on the money you've already earned..

Your investment generates a return. If you reinvest that return, it starts generating additional returns itself. Over time, the effect accumulates and growth accelerates.

A simple example:

• You invest €1,000
• You earn 10% a year, so by year-end you've made €100 and now have €1,100.
• Then, the following year, your base isn't €1,000 but €1,100. That means you'll earn €110 instead of the €100 from the previous year, assuming the same 10% return.

Keeping up that reinvestment for several years is what creates a significant difference by the end of the period, and the longer the period, the greater the difference.

That's why compound interest isn't linear; it's exponential. At first it seems as though nothing is happening, but over the years growth takes off.

What you need for it to work

For compound interest to do its job, you need three things:

• Time: it's the most important one.
• Reinvestment: don't withdraw the profits.
• Consistency: stay invested (the same idea as the previous point).

That's it.

To achieve the effect of compound interest you don't need extra contributions, although they certainly never hurt.

Time and compound interest

It's our best ally. More than the starting capital. More than regular contributions.

Time is what really pushes and grows the snowball of our investments.

Let me show you with an example:

• María invests €10,000 and doesn't touch that money for 20 years.
• Juan invests €1,000 a year over the same 20 years. In other words, he invests a total of €20,000, twice as much as María.

Well, assuming an average annual return of 10%, after 20 years María will have €67,275 and Juan €64,002. In other words, Juan ends up with less despite investing twice as much.

That's the effect of time on investments.

Which instruments make it easiest

Although I'll cover asset types and their investment vehicles in later articles, I'll give you a preview here.

Because I want you to know that not all products let you benefit equally well from compound interest. Some make it much easier than others.

#1. Investment funds (especially accumulating funds)

They're probably the simplest option.

The gains (including dividends) are automatically reinvested within the fund itself. You don't have to do anything and, what's more, you don't pay tax until you sell.

This allows the capital to grow without interruption.

#2. Accumulating ETFs

They work similarly to funds, but they trade on an exchange.

They also reinvest gains automatically, which supports compound interest.

The main difference is taxation: in Spain you can't switch between them without paying tax on the gains, unlike with investment funds.

#3. Dividend-paying shares (if you reinvest the dividends)

Here, compound interest depends on you.

If you receive dividends and reinvest them, you can achieve a similar effect. If you don't, growth slows down.

What's more, every time you receive dividends you pay tax, which slightly reduces the compounding effect.

#4. Pension plans

They also allow compounding, because the money stays invested for long periods and isn't taxed until you withdraw it.

The problem is the lack of liquidity, which limits their flexibility.

#5. Interest-bearing accounts and deposits

Compound interest exists here too, but to a very limited extent.

Interest rates are usually low and, on top of that, interest is taxed every year, reducing the cumulative effect.

A summary of compound interest

Einstein is often credited with saying that compound interest is the “eighth wonder of the world”, although there is no evidence he actually said it.

It's extremely powerful and depends less on the asset you choose than on what you do with its returns and, above all, on how long you decide to keep those returns invested.

If you're looking for the easiest way to take advantage of it, products that reinvest automatically and defer taxation are the ones that maximise it..

That's why, for most people, funds—especially index and accumulating funds—are one of the most effective ways to benefit from compound interest without making life complicated.

Conclusions

Investing isn't a way to get rich quickly; it's a tool to avoid losing purchasing power over time. If your money doesn't grow at least as fast as inflation, in real terms you're getting poorer and poorer even if the number in your account doesn't change.

The effect of compound interest is the real engine of long-term investing, but it requires time, consistency and reinvestment. At first progress is slow and barely visible, but over the years growth accelerates significantly.

Not all products let you benefit from this effect in the same way. Vehicles that automatically reinvest and make accumulation easier —such as investment funds—simplify the process and reduce mistakes compared with other options where more depends on your own decisions.

Finally, the key isn't finding the perfect investment—it doesn't exist—but maintaining a coherent system for years. Understanding the basics, being consistent and avoiding changes to the process, however tempting they may be, is what really makes the difference over the long term.

Next steps

If you want to go a little further, I invite you to continue with the next article in the series:

1. Investing from scratch: where to invest your money. (That's the one you're reading now).
2. Types of assets you can invest in according to their role in your portfolio.
3. How to buy assets: investment vehicles.
4. Investment platforms: where to buy investment vehicles or assets.
5. Investment risks and safeguards.
6. My investment system.
7. Wealth: how to grow it, protect it and pass it on.

And the extras:

1. How to start investing: the essential steps.
2. When to start investing.
3. How to make extra money.
4. How to save money.