Can effective interest rate be negative?

Can an effective interest rate actually be negative? It sounds crazy, right? Like, you’re paying someone to hold your money? Well, believe it or not, yes, it can. It’s all down to this pesky thing called inflation. Basically, if inflation is higher than the interest you’re earning, then the real return on your money is negative. Think of it this way: your money is technically growing (at 2%, let’s say), but everything is getting more expensive faster (maybe at 3% because, you know, inflation is a pain). So, even though you have more money, you can buy less stuff. It’s like one step forward, two steps back.

I remember a few years ago – I think it was around 2021? – when everyone was talking about this. Inflation was going up, but interest rates on savings accounts were still super low. So even though I was diligently putting money aside, it felt like I was losing ground. It’s a weird feeling, seeing your balance go up but knowing your purchasing power is actually shrinking. It’s almost like a negative interest rate in disguise, you know? It makes you wonder, what’s the point, right? Anyway, that 2% interest minus, say, a 3% inflation rate? Yup, that’s a -1% real return. Negative interest rates. They’re real. And kind of a bummer.

#Finance #Interestrates #Negativerates