Hi Folks,
I'm having a bit of trouble wrapping my mind around a financial concept, and I would be extremely appreciate of any insight some of you might be able to offer.
I'll do my best to explain the situation to you in a concise way. Here it goes:
I'm trying to determine how much to invest each period in a long-term hold strategy. Specifically, I'm trying to make guesses with a time value of money calculator as to how much my investment will be worth in a few decades. For this example, I assume I'll receive 10% back on my investment per year (on average over many years) before inflation is accounted for. I'll also assume that inflation is 3% on average, per year. I have been viewing my investments as making 7% to account for the 3% inflation in my example.
However, if I am letting money sit for a long period of time (let's say 30 years), and I invest $2,000 each month at the beginning of the period, it doesn't take long before the interest earned on the principle of my investment will far outpace my expected monthly cash outflows in my overall personal budget, adjusted for inflation.
Does it seem proper to look at my investment as much x% rate of return - y% rate of inflation? I ask because what boggles my mind is the point where my investments earn more interest in a period than I plan to spend in that same period. I understand the idea that inflation will make a dollar in the future less valuable than a dollar today), but for some reason, I can't help but think that I might be missing a key concept about rate of return vs. inflation since at some point, the inflation on my monthly consumptions won't keep pace with the interest earned on a large enough principal balance (inflation adjusted).
I hope that this makes sense. I have an accounting background, and I should know the answer to this, but I don't and it's been gnawing at me for awhile. Maybe there is a term for what I'm trying to ask about, or maybe I have a poor understanding of time value of money and I'm looking at this problem incorrectly.
I'd love to know if anyone can help? I promise to pay it forward. Thank you for any insight that you can provide!
Submitted September 22, 2023 at 12:32AM by TheTurkalurk https://ift.tt/ls051CV
