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Inflation erosion?

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If you were to keep it simple as you said (cash in the bank), then I really don't think there's anything else that you're missing. We also have to factor in the power of compouding the interest. Sure you have to think about tax and fees and inflation but interest as illustrated in your example, should be enough to hold its value over that time.
 
Noel Whittaker wrote this about 2 years ago. Should go somewhat to helping you Ato.

We are now in a new financial year with negative news everywhere, so it’s probably appropriate to remind ourselves that there are three basic areas where we can invest our money – cash, property and shares.

Now, it’s a good feeling to have plenty of cash in the bank, especially when you can get a safe 8% as you can right now, but the problem with cash is that it has no tax benefits, gives you no chance of any capital gain and is eroded by inflation.

A return of $8,000 on a deposit of $100,000 sounds attractive, but tax could take $3,200 leaving you with a net return of $4,800 or 4.8% - take off 3.0% for inflation and you are left with a net return of just 1.8%.

This is why holding cash over the long-term is one of the worst investment strategies of all.

In any event, there is a strong feeling that we are now at the top of the interest rate cycle, so in 12 months time you will be more likely to get 7.0% instead of 8.0%.

This leaves us with the good old faithfuls – property and shares.

It’s important to have an interest in both these camps, but it’s just as important to understand that they behave in very different ways.

It’s highly unlikely that your property will lose 30% of its value in a downturn, but there are ongoing costs such as maintenance, rates and land tax and it can be a long drawn out process if you ever try to sell it.

Furthermore, if you opt for non residential property, you can find yourself stuck with vacancies of a year or longer.

Shares will give you a much more exciting ride because their values will bounce around, but the big advantage of them is that you can buy and sell in small parcels, they provide tax advantaged income by way of franked dividends and over the long term, have been the best performing asset class of all – an average of 11% per annum over the last 10 years even after taking the present slump into account.

That’s hard to beat.
 
trainspotter said:
A return of $8,000 on a deposit of $100,000 sounds attractive, but tax could take $3,200 leaving you with a net return of $4,800 or 4.8% - take off 3.0% for inflation and you are left with a net return of just 1.8%.
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Hmm cheers, however where are these tax numbers coming from?

As a non-resident of Australia, I only pay 10% tax on my interest. So if we use the 100k example, that's $800 off in tax. Leaving me with 7200, or 7.2%, minus 3% inflation and we end up with 4.2%. Therefore the cash is holding it's value, and in fact increasing it.

Any help there?
 
If you are happy with 4.2% on your money then ... go you good thing! Ooooops ... take off 3% inflation and you now have 1.2%. Bugger. Take off some more for bank fess and then? DAMNATION ... where all my money go?
 
trainspotter said:
If you are happy with 4.2% on your money then ... go you good thing! Ooooops ... take off 3% inflation and you now have 1.2%. Bugger. Take off some more for bank fess and then? DAMNATION ... where all my money go?
Click to expand...

Please re-read my post above Spotter.
 
isnt there a big flaw in this subject......last year, before Oct you may have got 8%...but bank deposits are closer to 4% atm...give or take a bit...the ones that pay the higher guarantee of 2% are offering a high rate....with the higher risk
sure if you had a 12 month rate....but dont expect that rate for ever....some friends whose term deposits expired are now seeing 3.5
 
Quite correct Ato, my son vacuuming the carpet at 110 decibels distracted my train of thought. (no pun intended) Sorry for my lacksidasical approach to this very serious matter.

I double dipped on the inflation thingy didn't I? There is another cost to come out of the profit. Just can't quite get head around boy and vacuum cleaner at the moment. Will respond once house is clean.

Kincella, the thread started with ... Noel Whittaker wrote this about 2 years ago. Should go somewhat to helping you Ato.
 
Look, I'm not arguing that cash is the worst scenario here, I'm just trying to get my head around it with some concrete examples, particularly as I've seen my own account increase in value, albeit over a short time.

Also, I'm wondering where these values of tax on interest are coming from?

So to summarise, please answer with concrete examples, with maths too if need be; and show me what the tax rates are.

Please dont reply saying something along the lines of 'Cash is crap LOLOLOL'.

Cheers
 
trainspotter said:
Will respond once house is clean.

Should go somewhat to helping you Ato.
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No worries, Spotter.

Yeah, I guess two years ago when market was high did mean I was making a decent amount on interest. If I was to say I get 3% now, I get 3000 on the 100k, however inflation is also down isnt it? Isnt the inflation rate about 1-2% atm in Australia? So 2700 after subtracting 300 for the 10% in tax, leaving 2.7%. If inflation is 2%, then that's 0.7% left - not very much. (I dont pay many fees, only about $10 per year)

Hmm just checked it, and the inflation rate till March is 2.5%, meaning I'd be left with 0.2% under the above scenario. That is pretty craptastic!

Hmm although, living in Japan might mean that isnt so bad as we have a -1.1% inflation rate here. Assuming exchange rates were favourable when I wanted my money, that would be okay...
 
I think the saying goes "CASH IS KING" at the moment.

No, inflation is not down at all to my knowledge in Australia. I believe (but I could be wrong) and I hope someone out there with the correct info will respond, that inflation is about 3.7%.

Money in the bank is fine because you don't have to work it. It sits there grinding away and compound interest is a wonderful thing.

WIll do a bit more research and see if I can post some terrific looking pie charts and graphics and sliding scales and other meaningfull stuff rather than my experienced rhetoric.
 

Cheers mate.

Inflation rate is 2.5% (year to March) by looks of it. RBA site
 
may I suggest you do more research into how the CPI is rigged, instead of rely on a CPI rate....
for eg TV jumped in price from a range of 600 to 1000...but the price increase was not reflected in the CPI figures...the excuse was or words to the effect....the latest tv had more gadgets on it then the old one.....
hello....so when you go shopping for a tv and its almost doubled in price...but ignored for CPI purposes...what do you do ???
that is just one example....they try to keep the CPI figure low and distorted....its a sham....
so using a cpi figure of below about 6% will give you the wrong impression for your future calculations...
interest rates are also excluded.....hello...thats fantasy
an easier answer for you might be to compare the devaluation of your money..using house prices as a guide....houses rise in line with inflation
1986 median house price 80,800 by 2006 it was 396400 growth of almost 5 times....
so suggest your 100,000 today will be worth about 20,000 in 20 years time, or put another way....you will need 400,000 in 20 years to buy what you can today for 80,000
 
I was gonna say that !! But I was going to use the loaf of bread inthe future analogy. Loaf of bread today $4.00, loaf of bread in the year 2029 $132.00
 
Yeah, fair enough. I do agree governments love to distort their figures to make things look better than they are. Didnt think about that when I added the RBA link. Sorry about that.

So with your examples, what does that make the rate?

I certainly understand this analogy:
or put another way....you will need 400,000 in 20 years to buy what you can today for 80,000
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Tech/A made a similar one above. And they are quite sobering analogies O_O

But how do you calculate, rather accurately, what the inflation rate is?
 
no one can accurately predict the inflation rate, or the future ....
to make it simple... for a 1 year forecast....I would use the RBA rate plus 3%....or use the variable interest rates on offer....gives a similar figure...but a bit too low

5 years...I would use the rates above compounded...or a flat rate of 7% pa...an increase of 35%
10 years a flat rate of 10-15%....or compounded...
just set up an excel worksheet and put the different scenarios / rates in there

using the house prices as a model...over 20 years ...increased by 5 times
so over 10 years use 2.5 times

link to the house price data
http://www.aph.gov.au/library/pubs/RN/2006-07/07rn07.pdf
 
Goodo, cheers.

However why are we using house prices as a base for inflation anyway? Why not compare salaries? Or other things, like consumeables?

The first paragraph from that pdf (bold mine):
House prices in Australia have risen substantially over the past 20 years, far outpacing the growth in inflation, average earnings and household income.
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I guess there are a bunch of factors for Australian house price growth, but as a number of those factors could skew the values we use for inflation, wouldnt we be better off not using house price as a guide for inflation?

Perhaps salary would be better? I dont know, as said, I'm pretty new to all this, but house price rises seem to be a little too extreme for comparison with inflation.

no one can accurately predict the inflation rate, or the future ....
Click to expand...

Very true. I live in Japan. There has been deflation here for a long time. A house that cost 1mil 20 years ago, now costs less than half of that! Hell the rented apartment I live in that cost the owner 300k odd just ten years ago, is now barely worth 100k.
 
OMG, Japan is very different....are you looking at the Australian economy for your projections or Japan....if its Japan forget everything I have stated
otherewise.....
you need to factor in different scenarios....I am sure the cost of housing should fit in there somewhere..
that report shows salaries went from a base of 100 to 204, or 22,000 to 56,700...depends what you are looking for...what you hope to achieve

Japan is a hard place to predict....there is no imigration, no comparison with growth that Australia holds....

have to take the dog for its grooming session, and some treats
cheers
 
Strongly agree with Kincella - the rate of inflation is significantly higher than stated. Many important figures are not accurate, employment being another important one. I would count on at least 5% inflation, and my guess would be that it's even higher. With a savings account, I believe we are losing money.

why are we using house prices as a base for inflation anyway?
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I don't think we should, as house prices should naturally rise over time, and are also affected by inflation/booms. I don't think salary is good either, as it is also affected. Anyway, which salary would you use? The median won't work since it will change over time due to changing demographics in the working population, changes in industry etc.

As far as I know, there are no simple, accurate ways to calculation inflation. Even if we take a look at money supply, we still have to figure out how it is used and its influence.
 
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