In order to outpace inflation when investing, your investments need to have a lower rate of return than the rate of inflation.
Question: In order to outpace inflation when investing, your investments need to have a lower rate of return than the rate of inflation.
If you want to grow your wealth over time, you need to make sure that your investments are earning more than the inflation rate. Inflation is the general increase in the prices of goods and services over time, which reduces the purchasing power of your money. For example, if the inflation rate is 3% per year, a $100 item today will cost $103 next year. To maintain your standard of living, you need to earn at least 3% on your investments. Otherwise, you will lose money in real terms.
Therefore, when investing, you need to look for investments that have a higher rate of return than the inflation rate. This is called the real rate of return, which is the nominal rate of return minus the inflation rate. For example, if you invest in a bond that pays 5% interest per year, and the inflation rate is 3%, your real rate of return is 2%. This means that your money is growing faster than the prices of goods and services, and you are increasing your wealth.
However, if you invest in a bond that pays 2% interest per year, and the inflation rate is 3%, your real rate of return is -1%. This means that your money is losing value over time, and you are decreasing your wealth. In this case, you are not outpacing inflation, but falling behind it.
Therefore, in order to outpace inflation when investing, your investments need to have a higher rate of return than the inflation rate. This will ensure that your money grows faster than the prices of goods and services, and that you can maintain or improve your standard of living over time.
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