Inflation And Taxes Are Silent Killers, Eating Your Investments

Let’s take Mr Smith. He has $100,000 saved at the start of July 1st 2008. Not knowing what to do with the money, he finds a bank account term deposit giving 6% over 12 months. At the 30th June 2009, he now has $106,000 sitting in his bank account. Wow he thinks $6,000 for doing nothing but saving my money. He decides to rollover his $100,000 and takes out his $6,000 for a well deserved vacation.

OK we can dissect Mr Smith’s ideas a bit closer to work out how much money he has really made. Mr Smith in the 2008 to 2009 financial year earned $50,000 before taxes.

After taxes he earned $41,150. This is due to Mr Smith paying 17.7 percent on his pay. Guess what, Mr Smith has to pay this 17.7 percent on any interest gained. This is because the Australian government has deemed this to be included in his earnings. So out of his $6000 he must pay $1062 to the government in taxes. This leaves him with $4938.

His new amount of $104,938 does not represent $104,938 if he had this money at June 30th 2008. Sure it is the same dollar amount; however it does not have the same buying power. In fact inflation over this one year period was 1.8%. This means his $104,938 buys 1.8% less than it would have a year ago. So his real buying power is now only $103,049, at the date he put it in (e.g. July 1st 2008).

By taking out the $6000 dollars to spend on a hoilday he has gone backwards from where he started.

You must always, always take inflation into account. People in this country do not understand inflation as half as well as they should. This leaves them open to getting taken advantage of; paying too much and making bad choices where their money is concerned. Look at the two examples below to find out more about inflation.