Archive for the ‘Investing’ Category

My Interest Rate Can Beat Your Inflation Rate!

February 27, 2012

By Leigh Guth, Lincoln County Extension Agent 

There’s a wonderful Extension curriculum, Money Talk for Women, which I use frequently. Throughout the curriculum, the author points out how, in general, women view money differently than men. Women tend to think about money as security for themselves and their children rather than a sign of power or achievement. Because women are concerned about their security, they may be more conservative with their money and investments. Furthermore, we know from research that women are, as a rule, more focused on relationships. So, putting these ideas together, look at the following scenario:

I am a woman making money decisions on my own for my family. I do my banking right down the street from my workplace; I may personally know a banker through my social circles. Based on my comfort level and relationship, I chose to invest my money at that institution in a CD earning 2.25%. I feel confident working with someone I know, and I feel that I can access my money at an institution right down the block. Besides, this is not risky like the stock market – I’m guaranteed a fixed interest rate.

In this situation, by leaning toward security through a fixed-rate CD, the investor will lose money. Yes, the balance will continue to rise as interest is added, but buying-power is decreasing. Inflation is the rate at which buying power decreases. For example, $100 today buys less than it did two years ago.  In 2010, the average inflation rate for the year was 1.5%. In 2011, the annual inflation was 3%. And in January 2012, it was 2.93%. Only in the year 2010 (rate of 1.5%) would this CD offering 2.25% in interest get the owner ahead because the interest rate earned was more than the rate of inflation:

CD Interest rate of           2.25%

Less Inflation                    -1.50%

Net interest gain               0.75%

In 2011 and January 2012, this CD earning 2.25% might be secure, meaning that the investor is not at risk for losing any of the principal and will earn a guaranteed return on the principal.  But it is important to realize that the owner would be losing buying power: 2.25 – 3.00= -.75%.  The money, principal and interest, that is withdrawn at the end of the CD term the money will buy almost one percent less (-0.75%) of goods or services than the investor could have purchased with the principal alone at the beginning of the CD term.

So the next time you are evaluating interest rates on potential investments look for the other rate – the inflation rate. Make sure your interest rate can beat your inflation rate. Other investment options to consider include:

  • Mutual funds, which diversify the money invested over several products in an effort to minimize risk
  • Tax-deferred investments which include retirement accounts such as a 401(k) or an IRA.
  • Savings bonds are US Treasury-backed securities that offer modest returns, but also offer tax benefits.

Leigh Guth will be offering a Money Talk for Women series April 17-20 and 24, from 9 a.m. to noon. To register or learn more contact Leigh at Leigh_Guth@ncsu.edu.

Extension Agents, have you used Money Talk for Women? Do you think this curriculum’s assumptions about women’s investment habits are accurate?

Core Competencies Discussed: Saving, Protecting.