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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Sr K who wrote (77996)	4/19/2008 1:29:00 PM
From: benwood	Read Replies (1) \| Respond to of 116555

You are right that the buying power after on year of 10% annual inflation is lower by 9.09%. However, to retain one's buying power in the face of interest requires that the interest paid be 10% (tax free utopia) per year still. In the first year's dollars: (100 - 9.09) * 1.10 = 100 And to keep up one's purchasing power in a fully taxable account, one would need over 13% interest per year if one's tax rate is 27%. Again in the first year's dollars: (100 - 9.09) * 1.13 = 102.73 The taxable portion is 102.73 - (100 - 9.09) = 11.82 At 27% tax, one would owe the IRS 11.82 * .27 = 3.14 Oops, I still lost out. Net buying power in previous year's dollars is now 102.73 - 3.14 = 99.59 Look at this is at the amount of money it takes to purchase a bag of something that costs $100 at start of year and $110 at end of year. Obviously, one needs to grow that original savings of $100 into $110 to retain purchasing power. Work backwards from that 13% APR to get the monthly or daily compounding rate you need.