Inflation: the evil twin of compound interest

Compound interest

MoneyWeek will be 21 in early November. It has been a busy twenty years. We have passed through the dot-com bubble, two commodity supercycles, the real estate bubble, a financial crisis once in a century and a pandemic once in a century.

In short, we circled the block more than a traffic cop in London. But one thing we haven’t experienced yet: a nasty surge in inflation. I wonder if we will do it now.

Inflation not so transitory

John explains in detail why we’re worried in this week’s magazine, but the bottom line (which is mounting rapidly) is that all the signs are there. Massive money printing, which this time goes straight into the system rather than plugging holes in bank balance sheets as in 2008-2009. Supply bottlenecks, skills shortages and rising commodity prices – a combination that portends a wage-price spiral. And, last but not least, central banks and a majority of economists insist that inflation at multi-year highs is transient. It would be the same central banks and the majority of economists who did not see the financial crisis coming.

It may not be long before we start to notice that the prices of the items we buy on a regular basis are increasing. We all have our own daily inflation gauges. Mine is the Peppermint Aero. I remember a bar cost me 22 pence in 1988. Now it sells for 60 pence. The Bank of England’s inflation calculator, by far the most interesting thing on the website, suggests this is true: £ 22 in 1988 was £ 60 in 2020. Prices have almost tripled.

The average annual rate since 1988 is 3.2%, which is not bad. But apply this for 33 years and watch what happens. Push it up to 5%, and the money depreciates much faster. At this rate, £ 100 decreases to £ 36 in 20 years. Inflation is the evil twin of compound interest.

So keep an eye out for your favorite brand of cereal, chocolate or wine. Also beware of “retraction”. Sometimes the price stays the same but the package gets smaller. I think I remember that the 1988 Aero bar was a bit longer. I couldn’t swear, but I know for sure that only a few years ago Cadbury sold six fudge eggs in one package; now there are five.

Where does it all lead (beyond fudge in packs of four)? It is becoming increasingly clear that central banks have no intention of pushing inflation out of the system. They have subtly raised the bar on what they say they need to see or anticipate about inflation before they stop printing money through quantitative easing or raise interest rates. We hear time and time again that inflation should be temporary, and they will look at it. They suggest they will tolerate above target inflation for longer than in the past. This spring, the US Federal Reserve changed its official inflation target from 2% to an average of 2% “over time.” Two weeks ago, the European Central Bank also raised its inflation target. It is now aiming for 2% inflation in the medium term, whereas previously it tried to keep inflation below but close to 2%.

Interest rates cannot rise

The direction of travel is clear. The goal is to inflate huge global debt – largely caused by central banks keeping interest rates too low for too long, of course. A sharp rise in interest rates would cripple the global system.

Bond yields remain historically low, with investors apparently assuming the disinflationary environment of the past 40 years will last indefinitely. And central banks have bought much of the bond market with printed money, which also keeps yields low. The result ? We expect years of below-inflation returns, which is great news for gold. If rates end up rising in an environment of uncontrollable inflation, that will also benefit. I will top up my gold today – as soon as I finish my 60p Aero.


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Best online banks to borrow money

Borrow money

Taking out a bank loan can be a great solution. Whether it is to pay off a previous debt or to fulfill a wish, the “extra” money makes it easier to pay in cash and guarantees discounts. Even for other obligations: just trade directly with the company you owe, and conditions usually improve.

Obtaining values, however, deserves consideration. After all, the consumer is acquiring new debts and must pay them on time. Choosing the best bank is therefore an important step. In today’s article, we’ll show you the best online banks to lend money to.

1. App Cash

Source: time.com

Cash App is financial transaction software developed by Square Corporation. This payment tool allows you to receive and send money instantly, as well as invest in BTC or stocks. It is distinguished from other services by its Visa debit card, which can be used in stores and ATMs.

  • It’s free to send, receive and transfer money with just the debit portion of the account. If you need to make bank transfers, this is also possible, and there is a 3% fee.
  • Transfers are made immediately as soon as you send them; you can access it the same day or, in some cases, within three working days.
  • You can send up to $ 250 in seven days and receive up to $ 1,000 in 30 days. These limits increase as you use the app.
  • The Cash application is available for iPhone and Android.

Cash App is currently testing the loan function. As a relatively new banking tool, which has already worked very well, users felt confident when trying to borrow through the app. The loan service has been in operation since December 2020; if you want to understand step by step how to borrow money via Cash App, check out the article by Almvest.

2. GO2bank

Source: rdpsource.com

Go2bank is an online bank with low fees and is ideal for mobile devices. Banking has become popular due to the lack of monthly payments and good income with savings. The bank has certain tools, such as an electronic gift card, which generate up to a 7% refund in the app. And other types of bonuses such as purchases through the Amazon eGift Card app generate a 3% refund.

  • The bank has a deposit account. There is no minimum opening deposit or balance requirement, and you can avoid the $ 5 monthly fee with a qualifying direct deposit. It is also possible to deposit money at partner retail stores of the bank.
  • Savings. It is possible to earn 1% APY paid quarterly in savings of up to $ 5,000 – more than ten times the national average savings rate.
  • Loans from this bank are also relatively new, but they are already working across the market.

3. Bank Varo

Source: gobankingrates.com

The Varo bank account is a real online banking success. It doesn’t charge a monthly maintenance fee and you don’t need to maintain a minimum balance on your account. Government-issued ID and Social Security number are required for registration, but no minimum deposit is required to open your account. All you need is 18 years old and a smartphone to use Varo Bank. The company offers different loan options depending on your limit and how often you use the card.

  • At Varo, you can quickly access direct deposit payments. Deposits are generally made the same day they are received.
  • Varo offers a no-charge overdraft, which allows you to withdraw your checking account up to $ 50 when making a debit card purchase. There are no fees or interest charges, but you must meet two conditions to be eligible.
  • You must make five debit purchases per month and receive payroll payments or direct government deposits of at least $ 1,000 per month.

What is the best bank for a loan?

The definition of the best bank varies depending on the type of loan to be obtained. If the values ​​are obtained by payroll, for example, the employee of a private company does not have many options: he will only obtain agreements with the institution with an agreement with his company.

When taking a loan from the bank, it is necessary to assess several requirements in addition to the interest. What is your relationship with the company? Do you trust your manager? When is the deadline for debt settlement? What are the penalties and fines for late payment?

What do other consumers say about the bank’s service? So, before joining a service that has lower interest rates, evaluate all of these aspects. A good alternative is to visit the complaints websites in your country. There it is possible to check the opinions of the customers on the services of the bank and whether the financial institution is seeking to solve the problems of the consumers.

How to evaluate the different loan options?

Source: mybusiness.com.au

To come to a common denominator when defining the best bank for a loan, it is essential to consider several aspects. Just as institutions have different practices, so does the credit model. Among the main factors to consider when choosing a specific loan are the interest rates, the amount to be released, the terms of payment. The definition will therefore depend on the search for information and the adaptation to the candidate’s profile.

How to use online simulations in finding the best loan?

Now that you know what the best bank to borrow is, it’s time to make the right choice. For this, one of the resources most used by Brazilians is online simulation. With these tools, it is possible to evaluate options conveniently and without leaving home.

A search by browser leads to different modalities of online simulations, which can be done via a simplified registration and some additional information. From there, the resource pulls together proposals from other institutions, and you can think of which one best suits your intention.

Thus, it is possible to anticipate different scenarios, such as financing, debt restructuring, income commitment or even credit portability. You research quickly and feel more confident in your decisions.

Besides the simulations available online, another determining factor in choosing the right loan is the economic scenario of the country. Indeed, different factors influence the calculation of interest rates: health, government or price crises can affect interest rates in the country.


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3 reasons why you shouldn’t borrow money on your 401 (k) to buy a house

Borrow money

  • It’s possible to borrow money on your 401 (k) to buy a home, but many experts don’t recommend it.
  • If you can’t pay the money back on time, you will likely owe income tax plus a 10% penalty tax.
  • Additionally, you could lose compound interest, and borrowing money could indicate a bigger problem.
  • Read more stories from Personal Finance Insider.

A lot of my friends are buying houses right now, and I have a lot of questions for them. I usually start by asking non-intrusive questions, like why they decided to say goodbye to the rental or how they ended up in their dream home. Then I ask the burning question that I just need to know – how do they pay the down payment.

A friend recently told me that she took half the money out of her 401 (k) to pay her down payment. I had always been warned, for so many years by so many people, not to touch the money in your pension fund (unless it is a real emergency). I had heard about potential taxes, penalties, and the overall setback you would face if you take money out too soon. I wondered if what she was doing was a good idea or something that others should consider avoiding.

So I asked the experts and learned why financial planners and advisers say taking money out of your 401 (k) to pay for a house isn’t such a good idea.

1. You could be taxed

While you might look at your 401 (k) balance and think that you can withdraw some of the money and use it however you want, that isn’t necessarily the case.

There is an option to borrow money on your 401 (k) tax free if you pay off the loan on time (usually within five years). If you are using the money to buy a primary residence, you may have more time to pay off the loan, but that depends on your plan administrator.

But if you take the money out and don’t pay it back, you might have to pay taxes.

If you don’t pay off your loan on time, you may incur a 10% tax penalty (if you are under 59 1/2). You will also have to pay income tax on the withdrawal.

2. You could derail your savings progress

Your goal may be to buy that home now, but tapping into your retirement fund to get there could take you away from your future financial goals, experts say.

“By tapping into even a small portion of your retirement nest egg earlier, you run the risk of derailing the progress you’ve made in retirement savings on top of the penalties and taxes incurred,” explains Kenny Senour, a financial planner. “It is true that you can start to replenish the money you withdraw with your future paycheck deferrals, but the rebuilding can take a long time depending on the amount withdrawn.”

Financial advisor Jenna Lofton says you can also lose compound interest if you take out a lot of your savings and take years to pay it off.

“If there has ever been an investment where

compound interest
 works in your favor, it certainly is, “Lofton says.” These accounts are designed so that you live as comfortably after retirement as you can imagine yourself doing during pre-retirement. “

3. Typing on your 401 (k) may indicate a bigger financial problem

Some might justify dipping into their 401 (k) as a way to get a few more dollars to pay that down payment, but according to Steve Landersman, a financial planner, what they don’t realize is that they aren’t. not prepared for so many other costs.

“The main reason I object to people tapping into their IRA or 401 (k) plans to buy a home is because it shows they don’t have the necessary savings. to own it, ”says Landersman. “Just buying the house is the first step, there are always unforeseen expenses and upgrades.”

Jen Glantz is the founder of the viral company
Read more

More personal finance coverage


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Do you have to borrow money to invest in stocks?

Borrow money

Steve Mickenbecker of Canstar explains how it works: “Let’s say most first-time buyers of a home borrow with 20% equity, which is an 80% loan-to-appraisal ratio. They put in $ 100,000 and the bank put in $ 400,000 and the house is worth $ 500,000.

“When you’ve owned the house for a while and you’re making repayments and the home’s value has gone up, you could be in a position where your equity is, say, 30% and provided you have a income to fund a larger loan, the bank might say, “Well you’ve got the income, you’ve got enough equity, we’ll allow you to borrow an additional $ 100,000 to reduce your home equity again to 20%. “,” Says Mickenbecker.

You then use that money to buy stocks. Instead of slowly buying small plots of stocks as you save, you put a large amount of money up front to gain access to compound returns and instead use your future excess funds to pay off the loan. debt. This is called “the leverage” or “the gear”.

But wait, there is more.

In this case, the interest you pay on the investment loan can be deducted from your personal income as a tax deduction.

Sounds too good to be legal? No, according to ATO Assistant Commissioner Tim Loh: “It’s something that we see people doing. However, you can’t just buy stocks and claim some of your mortgage interest as a tax deduction (I asked). “You can’t do it because you don’t have a record to track how that money is connected,” says Loh.

So how do you do it?

“You have to create a separate loan account and then use that account for a particular investment, whether it’s stocks or exchange traded funds. That way, you can keep track of the interest invested in that loan – the interest you can claim as a deduction. “

If you do this, says Loh, you may also be able to claim other costs of building your portfolio, such as investment review subscriptions, bank charges, brokerage fees, and ongoing advisor fees. financial (although not the initial cost of advice on setting up a loan).

“If you’re somehow doing it passively – you’ve just invested it and you’re not actively managing the investment portfolio – you probably can’t claim a deduction,” Loh warns. “But if you do a little more and the amount of capital increases over time, then you absolutely can. “

Okay so you can do it. Corn should you?

“It depends on whether you think the stock market is going to go up or not,” says Graham Hand, editor of Firstlinks. And that, in the short term, is for everyone to guess.

Hand cautions against the potential losses of ‘leveraged’ investing: “Let’s assume a fairly simple example of someone betting on what you would call 50%. So let’s say they put $ 100 of their own money, borrow $ 100, and therefore invest $ 200 in the stock market. “

“Because their own money is $ 100, but they put $ 200 in the market, if the market drops 50%, they don’t lose 50% of their own money, they lose 100%. “

Hand saw it very badly for “leveraged” investors: “I was running a gear business during the global financial crisis and the losses were horrendous… a lot of people panicked. So, this is not for the faint hearted.

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But what if I just don’t sell? It’s simple to say but harder to do, Hand warns.

“If you talk to someone who has worked in a fund management company, they will tell you that redemptions are at their peak when the market is down and demand is at their peak when the markets are at their peak. It’s just people’s optimism, ”he says.

The MoneySmart website, operated by the business regulator, the Australian Securities and Investments Commission (ASIC), offers this tough advice on borrowing to invest: “Some lenders allow you to borrow to invest and use your home as collateral. Don’t do that. “ (The font in bold is from ASIC.)

Truly?

I checked with Laura Higgins from ASIC, who runs the MoneySmart website, who clarified that this is advice for newbie investors.

“Some investors would absolutely use the equity in their home,” Higgins explains. But, for new investors or those with less secure income, offering their home as collateral is no easy task.

“The question of a new investor putting their house in jeopardy is, I think, important. Can you imagine a young person starting out and then compromising his position in the housing market because he loses his house? “

“I think when you start investing, you first need to understand where your money is, what you can afford to invest and what is right for your personal situation,” she says.

Canstar’s Steve Mickenbecker is also cautious.

“People talk about the moral hazard of low interest rates and that is exactly one of the moral hazards. People look at it and say it’s so cheap to borrow, surely I can make money out of it and they take too much risk. “

For me, I’ll cool off the idea for a while and revisit it a bit further when I’m more confident in my budget and investment. Lots of food for thought!

  • The advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. They should seek advice from their own professional before making any financial decisions.

You can follow Jess’ more Money Adventures on Instagram @moneywithjess and sign up to receive her weekly email newsletter via Age here or The Sydney Morning Herald here.



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Things to consider when using simple and compound interest

Compound interest

In your graduate studies, when you have opted for or are looking forward to math or accounting, you must have come across the terms simple interest and compound interest. But have you ever imagined where either of the two terms would be used? Well, both formulas are very important to understand if you have a background in finance or if you have applied to an investment company or if you want to get into the CA, CS field. These are important concepts and it takes a thorough understanding to survive in the financial industry.

So here are the few essential points, tips and tricks you need to know when calculating simple or compound interest.

1- Application- The first difference between simple interest and compound interest is application. Always remember simple interest formula is always applied to a principal amount for the entire holding. On the other hand, compound interest is applied on the principal or the actual amount as well as on the interest frequently according to the months, quarters and years.

2. Anyone Can Benefit – To get a good return on investment, anyone can benefit from compound interest. The only thing you need to focus on is investing rather than saving. For example, if you want to invest in the stock market or in mutual funds, you do not need to be highly qualified or to obtain a degree from Harvard University, but you can benefit from the formula of compound interest.

3. Time is on your side – The more money flows or is compounded, the better and faster it grows. For example, if you get 7 percent interest in one year that will double in about 14 years and be worth four times in 28 years.

4. Funding is a double-edged sword – If capitalization can multiply your investments with little savings, at the same time it is a cruel situation of borrowing money where you have to pay back with compound interest. .

5. Building Wealth – It is okay if your wealth increases slowly and steadily with simple interest, but at the same time, if you look at compound interest, wealth increases at a higher rate.

6. Change in Principal Amount – Under the concept of simple interest, the principal amount does not change with increasing term and this leads to less returns in a period. On the other hand, principal and interest increase simultaneously and thus increase returns over a period.

7. Formula – Both have their formula defined while doing a calculation i.e. for simple interest the formula is = P * I * N

Compound interest is calculated with P (1 + R / N) N * T

8. Reap Profits in the Future – It is true that you have to balance your expenses wisely to get a successful result in the end. If you save a little today by either means, you may end up with higher returns in the future than your basket of investments can protect.

9. The Rich Concept Doesn’t Work – To earn a good return, you don’t have to be rich. You can even start from $ 100 or $ 1000 million, the mix works great and gives you the best for the amount invested.

To conclude-

The concept of simple interest and compound interest is very important and has significant importance in their daily routine. Simple interest does not compound, which means the other person will only get interest on the principal amount and not interest on the interest. In all businesses these terms are used, whether it is a loan company or financial institutions like banks, or financial advisers like wealth management organizations, etc. These terms have an important role in different fields.

So, if you are a beginner or want to go back in time to all the important concepts of simple interest and compound interest, Cuemath is the ultimate guide and will help you review all of these concepts effortlessly.


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