Lenders Are Losers
Lenders Are Losers
By
William Cate
If you have a bank account, you're a lender. You are lending your money to your bank, S&L or Credit Union. Since the 1932 Bank Crisis, in which 10,000 American banks failed, American taxpayers have paid the bank bailout costs, whenever an American bank went bankrupt. In the 1980s S&L Crisis, taxpayers footed a bill in excess of one trillion dollars to keep the American banking industry solvent and depositors returning bimonthly to add to their loans to their local banks. It's you and not the banking industry that is paying for deposit insurance. Currently, bank deposits are as good as gold. However, there is no guarantee that will be true in the future.
Banks pay interest on savings accounts and some types of checking accounts. In California, the best six-month Bank CD rate is around 4.5%. Passbook savings rates range around 2%. So, you not only appear to have a relative safe place for your money, you appear to be making money on your loans to your bank. However, you are actually losing money on your bank deposits and related conservative investments.
You must pay State and Federal income taxes on your bank interest income. A useful Rule of Thumb is that income taxes are about 40% of your gross taxable income. This varies by State. It's lower in States without an income tax. Tax payments on interest income, lowers your net bank interest payments for six-month CDs to about 2.7% and for passbook savings accounts to about 1.2%. You are still an apparent net income winner, if not much of a winner in the capital appreciation game.
The torpedo that sinks your economic ship is inflation. The U.S. Department of Labor reports monthly on the Consumer Price Index (CPI). Their statistical data is grounded in an old book entitled: "How to Lie With Statistics." Because the CPI influences economic and political decisions, it is intentionally designed to be well below the actual rate of inflation. Most businesspeople double the CPI to get an estimate of the current inflation rate. Most hard money gurus triple the CPI to determine the inflation rate.
For over a decade, the CPI hovered around 3% and the business community factored for a 6% inflation rate. In 2005, the CPI jumped to 4.7%. This means an estimated annual inflation rate of 9.2%. To buy the same item that costs you one dollar in December 2004 in January 2006, you'll need $1.092. In essence, you will need more dollars to buy the same item over time. Your one-dollar purchase in December 2004 will cost you two dollars in September 2012.
If you combined inflation and tax costs, you must earn a 15% interest rate to breakeven on your investments. Let's assume you have a $10,000 six-month bank CD and that you will rollover the money plus after tax interest payment until you retire. Also, the bank interest rate and State and Federal Income taxes as well as the inflation rate remain constant, at present levels. How long will it take your $10,000 plus net interest to buy $5,000 worth of goods? The answer is about 8 years! However, America appears to be going into an inflationary spiral. It will probably take less time for you to lose half of your nestegg.
Tax Exempt bonds avoid income tax and thus pay far lower rates. In fact, most moneylenders are better served seeking a higher interest rate and paying income taxes. However, the bonds interest rate doesn't offset inflation and the bondholder is going to be a big loser over time.
If you apply the tax/inflation formula to any conservation investment, you'll find that Lenders Are Losers. The basic formula is simple. Divide the net interest rate into 72. The result is the number of years it will take a positive net number to double the investment and a negative net number to reduce the investment by 50%.
Any type of conservative investment isn't risk free. However, they are lower risk than conventional investments. Your goal should be to seek investments with favorable tax & inflation risk/reward ratios. At least, your investments should allow you to breakeven on your investment capital over time. It's true that the higher the reward the higher the risk. Also, it's true that many investment options are swindles. I give you today's (3/15/06) news that the State of New York is suing HR Block for $250,000.000 alleging that HR Block is running an investment scam. I don't know if New York State is right, however, if you travel overseas and note the financial offers of many icons of the American and European Banking and Finance Industry, you'll realize that questionable investments are the norm and not the exception.
If you are going to seek a positive return on your investment capital, you should visit: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/id39.html]. It's riskier than bank deposits, but market pros make money.
If you prefer the appearance of safety, continue to hold your nestegg in your local bank, S&L or Credit Union or buy Government bonds. Like insurance, conservative investments give you a sense of security until the roof falls in on your future.
By
William Cate
If you have a bank account, you're a lender. You are lending your money to your bank, S&L or Credit Union. Since the 1932 Bank Crisis, in which 10,000 American banks failed, American taxpayers have paid the bank bailout costs, whenever an American bank went bankrupt. In the 1980s S&L Crisis, taxpayers footed a bill in excess of one trillion dollars to keep the American banking industry solvent and depositors returning bimonthly to add to their loans to their local banks. It's you and not the banking industry that is paying for deposit insurance. Currently, bank deposits are as good as gold. However, there is no guarantee that will be true in the future.
Banks pay interest on savings accounts and some types of checking accounts. In California, the best six-month Bank CD rate is around 4.5%. Passbook savings rates range around 2%. So, you not only appear to have a relative safe place for your money, you appear to be making money on your loans to your bank. However, you are actually losing money on your bank deposits and related conservative investments.
You must pay State and Federal income taxes on your bank interest income. A useful Rule of Thumb is that income taxes are about 40% of your gross taxable income. This varies by State. It's lower in States without an income tax. Tax payments on interest income, lowers your net bank interest payments for six-month CDs to about 2.7% and for passbook savings accounts to about 1.2%. You are still an apparent net income winner, if not much of a winner in the capital appreciation game.
The torpedo that sinks your economic ship is inflation. The U.S. Department of Labor reports monthly on the Consumer Price Index (CPI). Their statistical data is grounded in an old book entitled: "How to Lie With Statistics." Because the CPI influences economic and political decisions, it is intentionally designed to be well below the actual rate of inflation. Most businesspeople double the CPI to get an estimate of the current inflation rate. Most hard money gurus triple the CPI to determine the inflation rate.
For over a decade, the CPI hovered around 3% and the business community factored for a 6% inflation rate. In 2005, the CPI jumped to 4.7%. This means an estimated annual inflation rate of 9.2%. To buy the same item that costs you one dollar in December 2004 in January 2006, you'll need $1.092. In essence, you will need more dollars to buy the same item over time. Your one-dollar purchase in December 2004 will cost you two dollars in September 2012.
If you combined inflation and tax costs, you must earn a 15% interest rate to breakeven on your investments. Let's assume you have a $10,000 six-month bank CD and that you will rollover the money plus after tax interest payment until you retire. Also, the bank interest rate and State and Federal Income taxes as well as the inflation rate remain constant, at present levels. How long will it take your $10,000 plus net interest to buy $5,000 worth of goods? The answer is about 8 years! However, America appears to be going into an inflationary spiral. It will probably take less time for you to lose half of your nestegg.
Tax Exempt bonds avoid income tax and thus pay far lower rates. In fact, most moneylenders are better served seeking a higher interest rate and paying income taxes. However, the bonds interest rate doesn't offset inflation and the bondholder is going to be a big loser over time.
If you apply the tax/inflation formula to any conservation investment, you'll find that Lenders Are Losers. The basic formula is simple. Divide the net interest rate into 72. The result is the number of years it will take a positive net number to double the investment and a negative net number to reduce the investment by 50%.
Any type of conservative investment isn't risk free. However, they are lower risk than conventional investments. Your goal should be to seek investments with favorable tax & inflation risk/reward ratios. At least, your investments should allow you to breakeven on your investment capital over time. It's true that the higher the reward the higher the risk. Also, it's true that many investment options are swindles. I give you today's (3/15/06) news that the State of New York is suing HR Block for $250,000.000 alleging that HR Block is running an investment scam. I don't know if New York State is right, however, if you travel overseas and note the financial offers of many icons of the American and European Banking and Finance Industry, you'll realize that questionable investments are the norm and not the exception.
If you are going to seek a positive return on your investment capital, you should visit: [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/id39.html]. It's riskier than bank deposits, but market pros make money.
If you prefer the appearance of safety, continue to hold your nestegg in your local bank, S&L or Credit Union or buy Government bonds. Like insurance, conservative investments give you a sense of security until the roof falls in on your future.
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