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Compound interest: the saver's best friend

Dec 7, 2022

Redacción Mapfre

Redacción Mapfre

With an average inflation rate of 8.5% in Spain, savers have seen their reserves depleted. This year, the CPI has become the enemy of all households, reducing their purchasing power. However, the formula for lessening this blow is clear. You need to put that money to work through investment and rely on what Enrique Castellanos, director of the BME Institute, calls the saver’s best friend: compound interest. During his presentation at the tenth meeting with MAPFRE's private shareholders in Madrid, the analyst explained that this concept is nothing more than the interest added to the initial capital that generates new interest each year.

But how to generate the initial capital? The ideal option is to allocate a percentage of one’s salary to savings with fixed monthly contributions. That may seem like a difficult mission. However, the key is to eliminate superfluous expenses and do some financial planning. To do that, “we need to take into account what we want to achieve, what our ultimate savings goal is and what our financial situation is at any given time.” From there, you devise a methodical plan that takes into account the time you will need to achieve your objective,” according to Castellanos.

The time required and the target amount will determine the type of investment to be made, because, in the words of the expert, “it is not the same thing to have 25 years to raise 25,000 euros as it is to have five years.” In any case, referring to prudence, we must be aware that building savings isn’t some magic formula to quit working, and that the important thing is for this accumulated money to survive over time. Depending on the target amount, savers should decide which type of product to invest in. According to Castellanos, it would be ideal to start with a higher percentage in equities and end up with almost all of it in short-term fixed income. This does not mean that investors have to invest in very high yields (above 10%), as they involve risks that are excessive in some cases. However, an average long-term return of 6% is feasible.

The higher the profitability, the higher the risk. This is a maxim that must not be forgotten, particularly if your objective is to save for retirement. In this regard, Castellanos considers it essential to raise awareness of the need to supplement pensions with one’s own savings because “the population pyramid is inverting and in the future we may be facing a scenario in which pensions will be lower.”

MAPFRE offers different types of pension plans and, in particular, the Tu Futuro Program, a MAPFRE solution for the active management of eight pension plan portfolios, which adapts automatically and dynamically according to the client’s age and risk profile. It makes planning for retirement convenient and simple, and carries no additional cost. Ultimately, the important thing to understand is that financial planning is life planning. That was the conclusion of Felipe Navarro, Director of Capital Markets & Investor Relations and Treasury, following the presentation of the Group’s results at the Fundación MAPFRE Auditorium, which was attended by more than 35 people in person and could also be followed via streaming.

In line with our commitment to transparency, Navarro acknowledged in his speech the challenges the company has faced this year due to the context of volatility and economic uncertainty. However, through the ninth month of this year, premiums in the insurance business grew by 13.9%, and although earnings were slightly down on the previous year, the company remains committed to its shareholder remuneration policy. In this regard, the Capital Markets Director noted that the company's dividend yield is among the highest on the Spanish market.

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