Know the 3 R’s of Personal Finance… Real Rate of Return
07 May 2015
I recall a seminar I taught years ago at which I had a woman questioned my criticism of CDs (Certificates of Deposit). Actually, I believe she called me a “young whippersnapper”, so you can understand this was a few years back. Nonetheless, she recalled a day back when you could get 12% CDs. She looked perplexed as I correctly guessed when she had opened those CDs; she wanted to know how I could possibly have known.
I told her it was because inflation rates were between 10%-14% in those years. My point was that if you made 12% on a CD and inflation was 12% your real rate of return was 0% that year! Wait, it gets worse… You will also receive a 1099 from the bank for the 12% interest you made. So, in reality, you LOST money that year.
You must always subtract inflation AND taxes from your gross rate of return to get your Real Rate of Return. It’s an important aspect of personal finance and one that is often overlooked…
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