Interest Withdrawal vs Compounding Calculator
Do you get excited when you see the interest earnings on your investments? This tool can show you how much more money you could make by reinvesting your interest earnings instead of withdrawing them. For the sake of this calculation, we will assume that interest will be compounded monthly.
First enter the amount of your original investment, the annual interest attached to the investment, and the number of years you plan to let the investment grow. Press CALCULATE and you’ll see amounts for monthly interest withdrawal potential and total of interest withdrawals. You’ll also learn the future value of reinvested interest earnings and how much more interest you could be earning on the reinvested earnings. In the long run, a little patience could go a long way.
Comparing Compounding Interest vs Inflation
The average inflation rate is 3 percent per year. That means that what costs $100 this year will cost $103 next year. To put it another way, your $100 today will only be worth $97 next year. Three dollars may not seem like a big deal until you start thinking about your money over time. A $30,000 car today will cost just over $40,000 in 10 years. Because of inflation, your $20,000 savings account, in 10 years, with no interest, will be worth only $8,020.13!
Earning interest on your money is the only way to combat inflation. Since your money is constantly losing value due to ever-increasing inflation, you must combat the negative return and constantly earn value.The only way to do this is through interest. Whether you have a savings account or you are investing your money in CDs, mutual funds, or a 401K retirement plan, earning interest on your money is the only way to battle inflation and retain your money's value.
If with you withdrawl your earned interest then whatever you withdrawl is not compounding to fight off the ongoing inflationary impacts.
Not only do you have to deal with the loss of money through inflation, but you also pay taxes on any interest that you earn. This reduces the value of your investment even further. When you are determining how to invest money over the long-term, you will have to figure out your post-tax real rate of return.
For example, if you are considering an investment that has an 11 percent yield over five years, you must consider that the compound interest over that amount of time will be 7 percent, dropping the real annual yield to only 4 percent. If you pay 30 percent taxes on your interest earned, your earning will be a mere 0.7 percent.
Savings accounts are the lowest yielding in terms of interest and growing your money. Because the interest rates of savings accounts are at an all-time low, these are not the best way to hold, or build, the value of your money. Based on taxes and inflation, you'll have to earn 4 percent on your savings account just to break even. The current national average saving account interest rate is 0.6 percent.
Basically, savings accounts shouldn't be counted as a long-term investment. With the interest rates today, you'll be losing significant amounts of money if you leave money in savings for long periods of time. Rather, savings accounts should be used as a short-term place to hold your money.
Investing your money is a complex issue. However, there are two basic rules when it comes to investing. The first is diversification. Make sure that when you invest your money, you do so in different ways: stocks, bonds, CDs, as well as keeping enough money in your checking and savings accounts to meet your needs. Investing all of your money in a single type of investment is a good way to lose a great deal of money.
The second rule is to invest with a long-term mindset. Investments are meant to grow your money over time. Investing in the short-term is risky, since money returns have ups and downs. However, over time, investments are designed to make money, despite inflation. Being patient and leaving your money parked is wise and the most effective best bet.
If you'd like to figure out how your money will fare over time, you can use an interest rate calculator. Using an interest calculator, you can see how much money you will earn depending on your initial investment and the interest rate of your investment over time. However, once you figure out how much you'll earn, you'll use an inflation calculator to determine how much you'll lose to inflation over the same period of time.
Remember when calculating inflation, the average inflation rate is 3 percent. Hopefully, you'll find that you come out ahead and have not only maintained the value of your money, but have actually increased it.
Understanding compounding interest and compounding inflation is vital for maintaining and growing the value of your money over time. Inflation and taxation are here to stay. Therefore, knowing how to combat these two issues is critical to future planning, whether it be for a comfortable retirement or for saving money for something such as buying a house. As Ronald Reagan even said, "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." Knowing how to deal with inflation can keep you from having your money's value stolen from you.