Simple Truths About Money
9. Inflation and taxes are the most onerous of moneys enemies, what counts is the after-tax, after-inflation rate of return.
Some people keep their savings in "safe" places like bank savings accounts because they are afraid to invest. However, the value of your money is not safe in a bank account due to the corrosive effects of inflation. Inflation is defined as the process by which prices go up over time and has averaged about 3% per year historically. $1000 would buy about $410.00 worth of goods and services 30 years from now with inflation at 3%.
Investing your money to earn a rate of return above inflation, not only preserves the purchasing power of your dollars, but gives you the opportunity to grow your money
faster than inflation through the power of compounding interest. If you invest that $1000 in a balanced mutual fund earning 8.2% a year with inflation you will have
$10,636.97 at the end of 30 years, and taking inflation into consideration, $4576 of purchasing power.
Taxes also can eat away at your earned income and your investment income. Taxes are a fact of life, but there are strategies that can be employed to minimize their
effects on your income. Some of these strategies: saving in tax-deferred retirement accounts, utilizing Roth IRA's, effectively managing mortgage debt,
and choosing the right asset allocation for your taxable and tax-deferred accounts can favorably effect your final tax bill each year. With combined federal and state (CA)
tax rates topping out at 44.3% it is critical for financial success to employ as many of these tax-saving techniques as you can.
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