Building on the assumption that you’d invest 1 million into a 15% stable interest rate savings bond for three years, it is essential to understand that 15% is a nominal interest rate. To get the real interest rate you would be getting we must deduct the annual inflation rate from the nominal interest rate;
Year 1: 15% – 8% *the forecasted inflation rate for 2020= 7% real interest rate in comparison to 20% average appreciation rate in real estate for 2020.
Year 2: 15% – 7.60% *the forecasted inflation rate for 2021= 7.4% real interest rate in comparison to 15% average appreciation rate in real estate for 2021.
Year 3: 15% – 7.50% *the forecasted inflation rate for 2022= 7.5% real interest rate in comparison to 10% where the forecasted appreciation rate in real estate for 2022 is capped.
The reason it is important to understand and calculate the real interest rate is because as you agree to put your 1M EGP in a bond for three years, even though you will gain an interest rate annually, the buying power of that money is decreasing year on year due to inflation.
Tune in next week for a live example of buying power and real interest rates.