Question

You have $55,000 in a savings account that pays 2% interest per year. The inflation rate that year is 3.24%. To calculate simple interest: Principal x Rate x Time = Interest

Answer 1

Answer:

How much do you make in interest in a year?

$  1100

How much would you need to have made for your spending power to keep up with inflation in that year?

$  1782

How much buying power did you lose in that year because of inflation?

$  682

Explanation:

Your interest formula is given to you.

Interest in a year = principal (the amount invested) * rate (the interest rate) * period (the time you're measuring)

Interest = 55,000 * 2% * 1 year = 55,000 * 0.02 * 1 = $1,100

How much would you need to have made for your spending power to keep with inflation?  Your interest rate would have needed to match the inflation rate, otherwise prices are going up faster than you're saving.

Required interest = 55,000 * 3.24% * 1 year = 55,000 * 0.0324 * 1 = $1,782

How much buying power did you lose?  The difference between your required interest and your actual interest.

Buying power lost = 1,782 - 1,100 = $682.  You lost this much in buying power.

Hope that helped :)