Search this Site for Articles


Investment Interest Rate and Inflation Rate: An Inseparable Relationship
Updated: 2021-07-25T13:43:33Z

 

Let us say you've already deployed your funds to different investment vehicles and are just waiting for it to accumulate over time. However, there is one particular aspect in finance that can break your investments, which is inflation.

 

Investment Interest Rate and Inflation Rate: There Inseparable Relationship
"poverty-black-and-white-emotion" by Frantisek_Krejci is licensed under CC0

 

In simple terms, inflation means that your money is less than its value compared to the past. This is due to the price increase of goods and services such as food, clothing, housing, recreation, and transport.

 

This inflation will also affect your investments because, by the time you withdraw your funds, the money's worth will be less.

 

 

What is the ideal Inflation Rate?

 

According to the Federal Reserve website, the ideal inflation rate should be around 2% or a bit below.

 

 

How Can I Beat Inflation?

 

The solution is technically simple. You need to find an investment vehicle that offers a much higher interest rate than the average inflation rate.

 

Example:

 

  • Average Inflation Rate 3%
  • Interest you want to earn from your investment 5%

 

Based on the values above, you need to find an investment that gives at least 10% interest rate. This 10% value is just a ballpark/estimate because there will be several variables at play, like taxes and fees.

 

Why 10%?

 

Working from our estimate, you can breakdown the values as follows:

 

  • 3% will cover the inflation rate, this is to make sure that your capital doesn't lose its value
  • 2% will cover your taxes and fees
  • 5% will be your investment profit

 

 

 

Takeaway

 

Inflation is a good thing for the economy as it encourages consumers to buy products (consumers will tend to buy now than buy it later at a higher price). Tipping the balance slightly where there is more demand but supplies can keep up. Also, it combats the risk for an economy having deflation.

 

To have a clear picture of how inflation affects your money's value, I've created a little tool for calculating inflation (Inflation: Future Money Value Calculator). 

 

If you have some proven investments that can beat inflation, share it in the comments below.

 

 

 

Quote

 

"Inflation takes from the ignorant and gives to the well informed."
Venita VanCaspel
 
 
 
- Your Life In Perspective by ÆlfRæd (Elf Counsel)

Like What You’ve Read? Subscribe and Be the First to Hear About the Latest Updates.


Enter your email address:




back to top