If I put my money in a savings account for five years, and leave it and money inflates, do I wind up losing, winning, or breaking even?
2007-11-14 11:31:17 · 6 answers · asked by Anonymous in Business & Finance ➔ Personal Finance
It could do any of these, depending on how high the interest rate on the savings account is and how much the money inflates. Typically, interest is more than inflation. However, you have to pay tax on interest and cannot deduct value lost to inflation. Therefore, after considering taxes and inflation, you typically break even or lose slightly.
2007-11-14 11:36:34 · answer #1 · answered by StephenWeinstein 7 · 0⤊ 0⤋
You need to make at least 6% interest to keep up with inflation. The reason being that inflation has averaged about 4 1/2% over the years, today it is lower about 2% but the 4 1/2% is the statistical average. So if you put 100 in the bank in one year at 6% you have $106. However you now must pay taxes on the interest at 25% leaving you with a real gain of 4.5% or $104.50
2007-11-14 19:45:47 · answer #2 · answered by Amanda B 2 · 0⤊ 0⤋
Actually it's a component of the interest you receive. (I'm disregarding foreign debt in the following & this is a bit (OK a lot) simplified) but should suffice:
r= RFR + I R + DR + RR + LR
r= rate of interest you receive.
RFR = Risk free rate, the rate of interest the market is requiring to compensate for giving up the use of the money now while being guaranteed to receive it all back at maturity.
IR = Inflation Risk, the rate required to compensate the lender for the loss of purchasing power by maturity.
DR = Default Risk, the rate required by the lender to compensate for the risk the borrower can't repay.
RR = Reinvestment Risk, the rate required by the lender to compensate for the possiblity that at maturity the lender would have to relend at a lower interest rate.
LR = Liquidity Risk, the rate required by the lender to compensate for the inability to redeem the security, at full value, at a time of their choosing.
For instance a one year CD has nearly no DR and pretty low LR & RR so mostly the interest is the RFR & IR.
But a 5 year CD has a higher LR & RR so you'd expect to recieve a higher return.
2007-11-15 14:37:36 · answer #3 · answered by tiescore 6 · 0⤊ 0⤋
Depends if inflation over that 5 yrs is higher then your interest rate. But yes, it cancels gains, whether in the stock market, bank account, art, etc....
2007-11-14 20:00:50 · answer #4 · answered by Anonymous · 0⤊ 0⤋
you will just about break even when you figure taxes on the earning!!! but that is not all bad considering you are still even!!!
2007-11-15 10:44:35 · answer #5 · answered by mister ed 7 · 0⤊ 0⤋
Probably you will break even.
2007-11-14 20:05:32 · answer #6 · answered by Anonymous · 0⤊ 0⤋