Highlights in this issue:

•    Inflation: A crucial factor to consider when building wealth...

•    An exclusive peek at one of our 23 secrets to wealth…

•    Should you leave your money in the bank…? and more…

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From the pen of Karin Iten

Dear Investment Academy Reader,

Before we get into things… let me ask you a question: Are you following us on twitter yet? If not, you’re not only missing out on some great tips, you’re losing the chance to get to know Julie, Gary and I better. So what are you waiting for… join today. Can’t wait to see what you’re all up to.

Right, now let’s jump into today’s issue.

Borrowers may have welcomed lower interest rates – it’s another nail in the coffin for savers

Having already been hit by lower share prices, inferior property values, stagnant rents, lower dividends, South Africans are now waking up to the affect this is having on their savings.

Consumers are more worried about their jobs than interest rates

In an article written by Moneyweb’s David Carte, he states that “interest rates are the least of savers' concerns. Most consumers are worried about their jobs. If they aren’t reducing debt, they’re squirreling money away for future rainy days with scant regard to returns.” But with lower interest rates, we’re slowly letting our savings erode – without paying any notice.

But not considering how inflation affects your rainy-day fund is detrimental to any dreams of wealth. That’s why today, I’ve asked one of our Secrets of Growing Rich experts to explain the way in which interest rates can ransack your savings.

How inflation and interest rates impact your wealth

The most commonly quoted inflation rate in SA is the Consumer Price Index (CPIX). This index measures the changes in prices of a representative basket of goods and services, excluding mortgage rates and interest income. It’s really an attempt to measure how the cost of living changes for “Mr Average’s” household.

The problem is, “Mr Average” is a statistical artifice. He smokes, drinks and gambles according to the average person, pays rent and has a mortgage, owns a car, buys diet meals and eats fatty foods. Your spending behaviour may differ markedly from the average, but unfortunately government statistics aren’t customised. The CPIX remains our best guide for measuring the changes in the cost of living.

Work out your own CPI to discover how you’re affected

You can work out your own CPI just by noticing what’s in your monthly household basket, particularly food, fuel and monthly interest payments on you home and car.

The purpose of placing money in an interest-bearing deposit is to earn adequate return for holding off on spending. This is where you need to consider inflation to discover what your best performing financial asset is in that environment.

Let's look at an example with SA's current inflation rate at 8.4%. If interest rates are exactly the same, at 8.4%, the real interest rate would be zero. When real interest rates are zero (or negative, when the available interest rate is less than the inflation rate), it makes no sense putting your money on deposit.

Suppose that a money deposit was earning 5% a year and the inflation rate was running at 10% a year. This means that you'd need a 10% interest rate (after tax) just to break even. When real interest rates are negative, it makes no sense to check you’re getting the best interest rate possible.

Compare packages

So shop around. Identify your “user profile”. And then start comparing rates across the banks. To do this, visit www.bankmonitor.co.za.

Till next week, here's to your financial freedom…

Karin Iten
For the Investment Academy

PS: Don't forget to check us out on twitter to see what we're up to when we're not bringing you an issue of Investment Academy.