When is growth good enough?

With the rule of 72, I can figure out how long it will take my money to double.  Getting 10% interest?  You will double in 7.2 years.  5%?  14.4 years.  But who pays 10% consistently?  Or 5, for that matter.  And if I put my money there, will it be safe?  Will it be there when I need it?  I want to be safe so I am going to put money in something guaranteed, like CD's and other money certificates.  Is that wise?  They may only pay a small percent, but it will be there when I need it?  And it feels so good to get those statements every year saying how much I earned.  OK.  I also get a 1099 that I have to report as taxable income.  So that is even better, right?  When I spend the money, I don't have to pay any taxes like I would with the 401k.


I wrote earlier about the difference between earning tax free and paying taxes as you go.  There is another thing to worry about.  Inflation.  Though there seems to be a bit of debate right now about the current inflation rate and how it should be measured, what it comes to is this.  You money buys less this year then it did last year, and certainly 10 or 20 years ago.  During the 70s, we thought you were crazy in California if you paid over $100,000 for a house.  Who could be so rich?  And before the crash, the same homes were going for $700,000, $800,000 or more, depending on where it was.  Your salary may have gone up, but I doubt it kept up.
 
The average inflation rate has been around 3.5% over the last 20 years.  If you were to put away $100 a year ago and were able to earn 4% interest, you would have earned $4.  But since you put it in a bank account, you had to pay a dollar of it, 25%, to taxes.  So now you only have $3.  Then you also have to take away 3.5% in buying power, so deduct $3.50 from your total.  What have you got left? 
            

Start with	100.00
Plus 4% interest	4.00
Minus tax at 25%	1.00
Total	103.00
Less 3.5%	3.50
Your actual return	99.50

If you want to stay ahead of taxes and inflation, you have to make at least 5% interest.

Start with	100.00
Plus 4% interest	5.00
Minus tax at 25%	1.25
Total	103.75
Less 3.5%	3.50
Your actual return	100.25

                                   
I didn't know this when I spoke with my friend, Chat, so I now realize he knew more about money than I did.  He was.....sophisticated.  I like that.