Savings Rates Best

What a concept. Yes, it true. Your business should have a saving account. With the way the economy is going and I’m sure you can’t trust creditors or bankers or even your best customer. Savings for your business can save you in many ways.

I’m sure you are saying that you don’t want to lose profit or maybe you are just starting your business and you can barley-make ends meet. But you must look at it in a long-term situation. What about 5 years from today or 10 years, or you are celebrating 20 years. And what if you are having major financial problem at those time periods. What if you have a major fire or you need to hire an attorney in the future. Instead of juggling your money to make that payment, you can just withdrawal it from your business saving account.

We are always taught to put money into saving for your personal needs. Everyone who is earning money right now it told to put something up for retirement or just in case a rainy day. But what about a rainy day for your business, can you really protect yourself with business insurance or with your major investment capital.

Now what should you save and how much? I’ve spoken to a lot of small business owners and at home business owners and they recommend to put up 10% of all profit made from your sales per month into your business saving account. To me that sounds reasonable for a small business owner.

By putting that money up, you have a worry free future of in case a rainy day happens for your business. It’s easy to do and you can do it.

A lot of people say that your business insurance is for those cases. Now when you begin a business, the last thing you think about is business insurance and even tho you want that. You juggle with what type of insurance to have and how much. That takes homework and time to learn all the ropes about it. In the mean time, you can have your business saving account started right off the bat, just in case.

When I was talking to one of my clients about this subject, he was telling. That when he started his business 15 years ago, he only put 5% at first and then increased it to 10% about 3 years into the business. He said that it took some practice but as of today. He is so glad that he did it. That money saved him in a shipping fiasco he had, shortage in payroll situation and also when he wanted to throw an anniversary party at 10 years. He had the extra money and he did not worry about anything. Everything went smoothly for him and without a beat. But once he used that money, he made sure that he replaced back within 6 months of usage. He said that it was the best business decision that he made.

So when it comes to your business and after you have it setup and going and profit is starting to come in, place 10% into a business savings account and you will never have to worry about a business problem that you will not be able to handle.

Ricardo Gonzales is a Small Business Consultant and small business owner and has been writing small business and at home articles for over 8 years. His 28 years experience in business and helping other open their own business has allowed him developed information packages and advice. With his expertise in this field, he will help give and work on question that a beginner might have. You can find more tips in http://www.casholagrande.com.

As parents it is our responsibility to care for the needs of our children. We usually think of things like providing them with food, clothes, a warm safe place to live and an education. One thing that often gets overlooked though is helping them learn how to handle their finances. A great way to get them started on the right foot would be to open savings accounts for children.

By opening this account you will be helping your kids out in several different ways. The first, and most obvious, is that you will be saving money that will help them pay for college, or a first car. The earlier you start the less you will have to put aside each month to reach your desired goal. It won’t add up quickly, but it will add up.

Another huge advantage to encouraging smart financial habits from an early age is that when your children leave home they will have the knowledge they need to make smart financial decisions.

It seems hard to believe, but the truth of the matter is that many kids start to get in financial trouble at college. Credit card companies will camp out on college campuses and encourage students to sign up for credit cards. If the kids don’t have a sound financial education, and most don’t, they will get in over their heads very quickly. Their credit can be ruined before they’re even old enough to drink!

By teaching your kids how to balance their spending and saving habits from an early age they can avoid the traps that have ruined the financial future of so many before them.

Make sure to teach your kids that it’s not just about hoarding or saving. You have to also teach them that they can have fun with their money too, as long as it’s done responsibly. Nothing feels better than taking that hard earned paycheck and making a purchase. It’s also important that your kids learn how to make smart purchases. You can teach them how to be savvy shoppers.

You don’t want your kid to grow up being a tight fisted miser any more than you want them to grow up to be a spendthrift. Balance is the name of the game in finances.

So to make sure your child has a good eduction in reading, writing, ‘rithmatic…and finances, help them out when you open a savings account for your children while they are still young. The will have a lifetime of financial security to show for it.

As parents we are always looking out for the welfare of our children. We make sure they have enough to eat, clean clothes to wear, and a good education. One thing that often gets overlooked though is helping them achieve a strong financial footing when they grow up. Opening a child savings account can be a good way to ensure their financial security later in life.

Opening an account for your children while they are still young accomplishes a few goals. First of all, you won’t have to deposit a lot of money weekly, or monthly, to have a very large nest egg for your kids when they need it. If you start early enough by the time they’re ready for college you could have thousands of dollars saved even if you were only able to make small deposits and didn’t receive a very high interest rate.

Another benefit of opening an account for your kids is that you are teaching them sound financial habits from a very early age. Most kids don’t get much financial education at school or at home. This puts them at risk when they go off to college and the credit card companies are there just waiting to sign them up for a credit card. That is the first step to financial problems for many young people. They simply don’t have the knowledge to handle credit and they quickly get in over their heads.

As soon as your child is old enough encourage them to participate in the banking process. Take them to the bank when you make a deposit, show them how to fill out a deposit slip, encourage them to put a little into their savings account whenever they get some money for birthdays or holidays, etc.

One word of caution: saving is a good financial habit to start but you don’t want your kid to grow up with a feeling of scarcity or lack. You want them to understand that having their own cash to use if something unexpected comes up is true freedom but you don’t want them always thinking about and preparing for the ‘worst’.

Make sure they keep their saving habits in balance. They need to be able to spend their money occasionally too. That’s the only way they’ll learn how to be savvy shoppers later in life, and they need to learn that money, and to a degree, things can be a good thing to have. It’s a reward for working hard at a job.

Helping your child achieve a secure financial future can start with such a simple thing as opening a child savings account while they are still young. Teach them strong financial habits from an early age and they will be far less likely to get in over their head when they are an adult.

Any time you ask someone for beginning personal finance advice, often the first thing you will hear is that you need a savings account. But, why do you need a savings account? This article will explore the benefits and disadvantages of savings accounts.

1. Safe Place to Store More – Savings accounts are one of the safest place to save money. There are to types of protection that savings accounts serve. First, savings accounts protect you from casualty losses. If you are in the habit of storing money in your house, you are at risk of being robbed or losing your money due to fire or flooding. A savings account protects you against these risks. When you place your money in a savings account, the bank locks up your money and places it in fireproof storage.

2. FDIC Insurance – The second reason for why a savings account is a safe place to store money is from the fact that a savings account is FDIC insured. Since the 1930s, FDIC insurance has made banks a really safe investment. If the bank mismanages your money, FDIC insurance will protect you up to $100,000.

3. Interest – The third response to the question “Why do you need a savings account?” is that you need your money to be making you more money. The way that savings accounts do this is through the payment of interest. If you keep your money at home, you will earn nothing more from it. But, a savings account will pay you daily compounded interest.

I hope that this article helped to answer why do you need a savings account.

If you would like to learn more about savings accounts and other ways to make money from banking please read suntrust banking and highest interest savings.

Where Should I Put My Savings? Different Types of Investment Accounts

In the big world of investing, it seems we hear a lot about what securities to invest in, but not as much about what types of accounts to invest in. There are so many different types of investment accounts, each covering a different purpose, and new types of accounts seem to be created weekly. What are some of the basic types of investment accounts and what can they do for you? This article covers some of the accounts that are available currently and why you would use each one.

Retirement Accounts

IRA stands for Individual Retirement Account. An IRA is meant for those who do not have access to employer sponsored retirement plans such as 401(k) plans or those who would like to contribute more than the maximum allowed by their employer plans. Why choose an IRA? Tax-deferred growth is the answer. With a standard savings account, you have to pay taxes on the interest or earnings that the account makes each year. An IRA, on the other hand, doesn’t require you to pay taxes until the money is taken out in retirement, thus leaving more money in the account to grow each year. In many instances you can also deduct your IRA contributions on your taxes, giving you further tax savings. It seems like a small thing especially when the account balance is still small, but over time it makes a big difference. Investing 10,000 for 30 years in a regular savings account with a 28% tax bracket and a 6% average growth rate will give you 35,565 whereas that same amount put into a tax-deferred account will give you 57,435. Eventually, however, you do have to pay taxes on the earnings in your IRA, but you are still left with 44,153 after taxes are paid. Your net gain for tax-deferred growth is just over 8500.

Another individual plan is a Roth IRA. It is somewhat similar to a traditional IRA but the difference is that you cannot deduct the contributions and the earnings grow tax-free instead of tax-deferred. This type of plan is good for someone with a longer timeframe to invest or those whose tax bracket in retirement will be close to or higher than their current tax rate. Tax-free growth means that you don’t have to pay taxes on any of the earnings in the account. If we start with 10,000 and invest it for 30 years at 6% growth like our example above, you would be left with 57,435. None of that money has to have taxes paid on it since the initial 10,000 already had taxes taken out and the earnings grew tax-free. Before you wonder why anyone would not automatically use a Roth IRA, consider the fact that the initial 10,000 investment wasn’t tax deductible like it was for the traditional IRA above. With a 28% tax bracket, the Roth paid 2,800 on its initial 10,000 investment. If we look at the growth potential of 2,800 for 30 years in a tax-deferred account, it grows to 16,082. So, in this person’s situation where their tax bracket is the same in retirement as it is while working with a 6% rate of growth, a Roth wouldn’t be the best option. The Roth would only grow to 57,435 – 16,082 = 41,353 when all taxes are taken into consideration while the traditional IRA would grow to 44,153. There are several online calculators that can estimate which type of IRA would be to your advantage. Search under Roth vs. Traditional IRA for more information and calculators to determine the best account for you.

In addition to individual plans there are also employer-sponsored plans. SEP IRA, SIMPLE IRA and Keogh plans are in between Traditional Individual Retirement Accounts and the standard employer sponsored plans such as 401(k)’s. SEP’s, SIMPLE’s and Keogh’s are for self employed individuals or small companies that need to put aside more money than a standard IRA allows but aren’t large enough to warrant the expense of a 401(k) plan. Each plan allows both employee and employer contributions. Each has set maximums between 6,000 and 30,000, depending on the plan and the contributor, and each has tax incentives for both the employer and the employee. These plans are great for small businesses to be able to set aside money for themselves and their employees and not have to go through the time and expense of larger employer sponsored plans.

The last type of retirement plans are employer sponsored plans. When it comes to retirement, it seems everyone knows the term 401(k). This is because a 401(k) is the retirement plan of choice for medium and large companies. In 2006, the maximum contribution to a 401(k) is 15,000. If you are over fifty and your employer offers the 401(k) “catch-up” contribution, you can contribute up to 5,000 more, so 20,000 total. Your employer may also contribute to your 401(k) plan which generally doesn’t decrease your contribution allowance. Originally, 401(k) plans were only offered to for-profit companies. Those who worked for non-profit companies such as charities, schools, universities and hospitals weren’t able to contribute to 401(k) plans but were able to open 403(b) plans which allowed most of the same contribution limits as a 401(k). Government or public employees often used 457(b) plans for their contributions and for highly compensated employees there are 457(f) plans. This eventually changed to where 401(k) plans are now available to non-profit companies so more and more of the non-profit sector are opening 401(k) plans for their employees. Taxes on these types of plan can vary from one plan to another, so it is best to consult your plan director or talk with the investment company that manages your employers plan.

Education Savings Plans

Education plans have become available in the past decade allowing parents to better save for their children’s education. Instead of trying to set money aside in taxable savings accounts, parents can now setup an education savings account that has various tax advantages depending upon the type of account used. Choosing an education savings account depends upon what your long-term goals are for the money. There are three basic types of education savings accounts, IRC section 529 plans, the Coverdell Education Savings Account (CESA) and the Uniform Gift to Minors Account (UGMA). Each plan is tailored a little differently when it comes to its tax advantages and who gets the money from each plan, but each has the same general purpose, to save for your children or grandchildren’s future.

Medical Savings Accounts

There are three different types of accounts to help you save for healthcare costs, Flexible Spending Accounts (FSA), Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA). The first of these, Flexible Spending Accounts are also called section 125 plans or “cafeteria plans.” This plan allows participants to put pre-tax money into the account each year to cover health insurance deductibles, co-payments, dental care and other medical expenses. Cafeteria plan money cannot accumulate from year to year, however, so it needs to be used up in one year or it will be gone. The second type of medical savings account is a Health Reimbursement Arrangement. It is similar to an FSA but the employer contributes to the account instead of the employee.

The employer can make contributions contingent on an employee participating in designated health and wellness programs. In June 2002 it was updated to allow funds to rollover from year to year, but it cannot be rolled over from employer to employer so if you change employers, you loose the accrued benefit. The last and most recently created plan is a Health Savings Account. This plan enables employees with high-deductible health insurance plans to set aside and invest money to use to pay the deductibles or other healthcare costs in the future.

These plans are designed to put healthcare decisions more into the hands of the employees. These plans are also portable so they move with you when you change employers and they can be rolled over from year to year.

Other Accounts

For those who are just looking to invest, a brokerage account is the medium to use. Brokerage accounts are setup through investment companies to allow you to purchase securities such as stocks, bonds, mutual funds, money markets, options, etc. Generally the money sits in a “core” account such as a money market until you are ready to invest it in other securities. There are fees for purchasing many securities which vary depending on the company that the account is setup with. Brokerage accounts can also offer check writing, debit and ATM cards for easier access to money in the account. Since there are no tax-advantages of a brokerage account, money can be withdrawn at any time from the core account. These accounts are perfect for additional savings that you want to invest in the stock market.

The standard savings account is probably what everyone is most familiar with. Offered by any bank, a savings account allows you to set money aside and receive a variable or fixed interest rate depending upon the account. Savings accounts are very liquid and can be withdrawn at any time, but they don’t allow check writing capabilities. Most savings accounts now days do offer ATM cards. Certificates of Deposit or CD’s are types of savings accounts that require money to be left in for a certain period of time in exchange for a slightly higher interest rate, these accounts are less liquid and there is generally a fee to take the money out before the predetermined period of time.

Whatever the reason or account used to set aside money, it is always a good thing. Savings in any form creates a more secure financial future and allows for problems or emergencies to be taken care of without having to obtain loans or dip into less liquid savings such as a home or other physical assets. Opening up any of the above types of accounts gets you started on the right track towards savings.

Copyright 2006 Emma Snow

Emma Snow is a writer who specializes in financial planning. She has worked in the financial industry for over eight years. Currently Emma works on a Finance and Investing site at http://www.finance-investing.com and Investing Partners [http://www.investing-partners.com]

For many people the concept of ‘offshore’ is something clandestine, available only to the excessively wealthy or those seeking to evade taxation. In reality ‘offshore’ as a financial concept simply means placing money, wealth or assets in a country other than the one in which you live.

Naturally enough those high net worth individuals who place money offshore usually do so to take advantage of the favourable taxation regimes available in so called tax havens – but even for the likes of you and me there are advantages to the offshore world that we can all benefit from.

For example – offshore savings accounts are a type of simple savings vehicle that can allow any of us to either save a regular monthly amount or a lump sum, earn higher rates of interest from some offshore providers than we could if we saved ‘onshore’ with the local bank – and what’s more, we can earn our interest gross and only pay tax on it once annually which allows for extra compound growth in the interim which can give our savings a little extra boost.

Yes, I did mention paying tax…

Most of us still have to pay tax on any income or gain that we derive even from investments or savings that are placed offshore.

We are under an obligation to tell our local tax authority about any offshore savings accounts we have when we make our annual declaration to the IRS or HM Revenue and Customs. But because taxation is not deducted at source on the majority of offshore savings accounts we have up to a whole twelve months of compound interest giving our savings even greater growth power which makes saving offshore advantageous even when we ultimately do have to pay tax on the gains we derive from our savings.

The offshore savings accounts that offer the highest rates of interest are available to those in a position to regularly save large amounts monthly.

Basically the more you can afford to save the higher the rate of interest you will be given, the higher the rate of interest the greater the compound growth you can earn and the harder your money will work for you.

A number of leading international banking providers offer offshore savings accounts that are easily accessible and secure. For example HSBC is one global brand that most people are familiar with – you can open an account with HSBC offshore from a high street branch and then have full access to your account and growth statistics online whenever you want making it so simple to open an offshore account and even more simple to keep an eye on it.

Gone are the days when saving and investing offshore was complicated, clandestine and the realm of the super rich or the super criminal – and we herald the arrival of an accessible concept of offshore from which we are all welcome to benefit.

Rhiannon Williamson writes about making the most of your money to secure your future financial security. Visit her site to read more about offshore saving accounts and straightforward personal financial development.

A saving bank account is basically a account where you deposit your money into this account and thus keep it safely. When you keep your money in this account, you will start earning interest on it. In other words, the bank pays you for keeping your money in the savings bank account. This earning is in the form of interest earned on the total amount kept with the bank. The bank takes care of the deposited amount. If you could carry your cash with you, all the time or keep it in the house, you are likely to loose it in the form of robbery or your house could be destroyed along with the money during, calamities. But if the same calamities take place while your money is kept in the bank, it will be the banks responsibility to pay you back at any cost. Thus you will not only cultivate the habit of saving money, by keeping the money in the saving bank account but, you are also assured that your money kept with the bank is safe and sound.

The bank provides interest on your savings and at the same time, banks also earn money for themselves by providing loan money to business people on consumers. So people deposit money in the bank and this same money is then given to other people who pay interest on the borrowed amount. Banks make money by charging interest amount which is more than the interest paid to the person who puts his money in the bank. Everyone including businessman, will benefit by having a bank account for themselves as it provides various facilities such as providing check payments, keeping of records of various transactions involved between the employer and his clients. Thus checks are the best way to keep a track of business transactions, even at a personal level. You can save your time and money without having to travel physically to the person to whom you have to make a payment. All that you need to do is just draw a check in the name of the concerned person and the bank does the needful. These days you have online transactions which are very common. You can transfer money from your own account to other peoples account just by a click of a button. I am speaking about online bank to bank transfer.

These kind of accounts help you to keep your extra money with the bank for which you earn interest amount. So instead of keeping it at home which is prone to risk, you can always keep your cash in a saving bank account. By this way, you also cultivate a habit of saving. You must try to keep a part of your monthly earnings in a saving bank account. Having accumulated enough savings over a particular period of time, you can then use your savings to make specific purchase. You can also use your savings for a rainy day.

This has now become a part and parcel of our lives. As soon as the person starts earning money, he or she must have a account in order to keep his earnings in his account and thus safe guard his own money and also be able to earn interest money paid to you by the bank. You must always keep a track of the amount you have in your bank account. You must maintain an average quarterly balance, otherwise the bank will charge you a penalty for not being able to maintain the minimum balance that is required by the concerned bank.

Amit Bhawani is a Professional Blogger who writes different How to Tutorials and answers different questions asked by professionals at Answers Next which is a free Questions – Answers Portal where you can Post Questions & also share your knowledge by answering to others questions. You can find related content at AnswersNext.com

Using Your Health Savings Account to Pay for International Travel

Thousands of U.S. citizens are taking advantage of the low cost and high quality of foreign hospitals by traveling abroad for medical treatment. The savings are often 75 percent or more, and the entire cost of treatment may even be payable with tax-free money from a Health Savings Account.

Medical tourism first began to get popular in the 1990’s, when people began traveling in large numbers to Brazil for cosmetic surgery. But as costs have continued to rise, thousands of Americans have been traveling overseas for real medical conditions, such as knee replacements, by-pass operations, heart valve replacements, and other serious issues. Many countries are seeing medical tourism as a good way to bring in foreign money.

In many cases the quality of medicine available overseas is equal to the top hospitals in the U.S. Patients are showing up at places like the Apollo Hospital in Hyderabad, India, part of a 36-hospital chain founded by a cardiologist from Massachusetts General. A heart valve replacement may cost $50,000 to $100,000 in the U.S., and only $12,000 in India, including travel costs.

Escorts Heart Institute and Research Center, in Delhi, India, is another popular medical tourist destination. It was founded by Dr. Naresh Trehan, an authority on robotic cardiac surgery formerly based at New York University.

Blue Cross Blue Shield has just announced that they will pay for treatment at Bumrungrad International Hospital, in Bangkok, Thailand for individuals from South Carolina. Over 80,000 Americans received treatment there last year. The hospital boasts that over 200 of its doctors are board-certified in the U.S, and will perform a knee replacement operation for 20 percent of what it would cost in the U.S.

Who Does This? Dodie Gilmore is a 60 year-old rodeo barrel-racing champ from Oklahoma. She runs a 180 acre ranch, but could no longer ride a horse because she needed a hip replacement. Her health insurance plan had an exclusion that wouldn’t cover her operation, and she really didn’t feel like paying the $35,000 it would cost her. Instead she and her partner flew to India where she had the surgery at the Max Institute of Orthopedics and Joint Replacement.

Her physician was Dr. S.K.S. Marya, who averages one American hip-replacement patient every week. Dodie’s total coast, including travel, was only $11,000. She even managed to take in a tour of the Taj Mahal.

Forty to Sixty percent of those surveyed say they would consider surgery abroad if it could save them $5,000 or more. Going out of the U.S. (perhaps even just to Mexico), could be a worthwhile strategy if you have an exclusionary waiver on your policy, if you’ll be having elective surgery not covered by your health insurance policy, or if you have a high deductible plan.

What is the Risk? According to the Institute of Medicine, over 100,000 accidental deaths occur in hospitals every year. And that’s here in the U.S. Hospitals are a dangerous place to be, and you want to spend as little of your life in one as possible. So there are risks everywhere, and probably greater risks outside the U.S.

But the magic of the free-market does give you some protection. There is a lot of money flowing to countries and international hospitals that practice high-quality medicine. If a hospital does not provide quality service, you can bet its customers will go elsewhere, particularly if they are choosing among anywhere in the world.

The influx of foreign patients (and money) is enticing more western-trained doctors to return home, so the choices are actually increasing, and the quality and prices continue to improve. I believe that if you use care in choosing your provider and structuring your treatment, the risks are no greater than having surgery here in the U.S.

How to Research Your Options Keep in mind that most health insurance plans still will not cover for treatment outside the U.S., particularly if you are traveling specifically to receive medical care. So check with your insurer if the cost of the treatment is going to exceed your deductible.

The Joint Commission on Accreditation of Healthcare Organizations certifies hospitals here in the U.S. Their international division, Joint Commission International, certifies hospitals throughout the rest of the world. Make sure the facility that you are considering has been certified by them.

Then check out your doctor. Confirm that he or she is English speaking, and was trained in the U.S., U.K., Australia, or Germany.

Finally, consider hiring a consultant to help you choose the best hospital and surgeon for your needs. A good service will not only set up the treatment, but can also arrange all travel plans, meet you at the airport, and act as your liaison while you are being treated.

If you spend money from your Health Savings Account to pay for international medical care, the amount you withdraw is tax-free. Health Savings Account regulations also allow you to cover the cost of your travel if the reason you are traveling to get medical care is not “for purely personal reasons.”

When choosing how to manage your health, you should carefully consider all your options. International travel is a great option for people with Health Savings Accounts.

By Wiley Long – President, HSA for America (http://www.health–savings–accounts.com) – The nation’s leading independent health insurance firm specializing in individual and family coverage that works with a Health Savings Account.

Top 5 Things To Look For In A Savings Account

We all like to try and put some cash away for emergencies, for the future, or simply to save up towards a luxury holiday or other things that we want in life. Fortunately, we no longer have to stash the cash under the mattress or in the biscuit tin, as there are many savings account options available to those that want to put some money aside. It is important to remember that the type of savings account that you opt for should depend on a number of factors, including how accessible you need the money to be.

1. One of the main things to look for in a savings account is the interest rate that is being paid. Some savings accounts offer a very low rate of interest, and do not pass on interest rate hikes applied to the base rate by the Bank of England. Other accounts offer very impressive interest rates, and this means that you can earn a considerable amount more in interest each year, particularly on larger deposits.

2. Convenience is another factor that many people take into account. Some people don’t want to have to traipse all the way into town in order to deposit money or take money out. Of course, the popularity of phone and Internet transactions has made this easier in some cases, as you can often make deposits and withdrawals simply by transferring money from your savings account to your bank. However, this can take a matter of days unless your savings account is with the same bank as your current account.

3. Accessibility is a very important consideration when looking for a savings account. You need to determine how easily you want to be able to access your money. If you are in it for the long haul you can opt for an account that requires notice on withdrawals, which means better interest rates and less temptation to withdraw cash on a whim. However, if it is for emergencies or you think that you may need instant access, then you should go for an instant access savings account.

4. Another thing to bear in mind is that many savings accounts have minimum and maximum deposit levels, and therefore the savings account that you opt for will also be dependant upon the amount that you are planning to put into the account.

5. Take the time to compare savings accounts, as there are many different types available. Look at all areas, such as rates of interest paid, accessibility, penalties, benefits, etc. and then make your choice based on what the savings account offers and your own needs.

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Why ever do interest rates exist? Who in the world invented such a torturous tool that makes your initial loan more expensive than it really was? After all, aren’t we borrowing money for the simple fact that we are short of it? Heck, such opportunism really can buy you an express ticket to the netherworld.

But are interest rates really the work of the devil as some people say? Before we come to understand interest rates, we must first understand the factors that affect it. One of these factors is “inflation”.

Inflation can be described as the power of your one dollar to purchase items. It is related to the Consumer Price Index or CPI. Now the CPI measures the percentage increase of basic commodities through a pegged year. The pegged year is normally a year in which the economy for that country performed exceptionally well. Now the list of these commodities is entirely at the discretion of the nation’s economic managers. Why? Because the world is full of different cultures. Some cultures are heavy rice eaters, while others prefer corn. Some are heavy wheat consumers, while others aren’t. What is a basic commodity in your country may not necessarily mean that it applies to another.

Anyway, back to inflation. When prices increase, your dollar gets to buy less. Over time, prices tend to steadily increase. Hence, your one dollar today is not necessarily equivalent in value to your one dollar tomorrow. A case in point: if you could buy four comic books with your one dollar when you were younger, guess what, Batman? You can’t even buy one these days at that price. That is inflation.

So how is this related to interest rates? Investors, try to preserve the value of their money by investing in activities that have yields that are either equivalent or higher than the inflation rate. Let’s say that the local interest rate is pegged at 6.5%; the money that you earn, save and invest, should be able to at the very least, match that rate. Why, because at the end of the year, if your money stayed inside the piggy bank, its value would’ve been eroded by that rate. So if you save 100 dollars at the start of the year, at the end of the year its worth would’ve been shaved by $6.50 leaving your $100 worth only $93.5.

In developed economies, bank savings interest rates normally equal that of the inflation rate. If competition is fierce between banking institutions then you will get higher interest rates thus more yield for your money.

So who decides on the interest rate to be used? Normally, it is the central bank of the country. Bear in mind that the rate they will declare is not something that needs to be followed. It is a benchmark, thus anything below that level automatically is a loosing proposition for your investment.

So to wrap up, inflation is one of the factors that affect interest rates. When inflation moves up or down, the tendency is to increase or decrease the benchmark interest rate as well.

Michael Russell Your Independent guide to Interest Rates