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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Saturday, September 09, 2006

Effects of Taxes and Inflation on Cash

Cash-equivalents have historically been vulnerable to inflation and taxes. Taxes and inflation can completely eat away at any gains you receive by investing in them. Treasury bills, money market funds, and CDs can return negative growth when considering taxes and inflation.

Take $10,000 in 1980-2000. Their average was 6.6% resulting in an ending value of $36,072, but when you add in the effects of taxes the $10,000 became only $21,384. The average return after both taxes and inflation results in a -0.3%. So remember to consider these factors before investing in these instruments.

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