Impact of Taxes, Inflation, and Currency Illustrated

After I wrote “The Weak Dollar is Killing Americans’ Wealth” for Consumerism Commentary last Thursday, I was still intrigued by this new perspective on wealth. As a visual person, I thought this alternative look at the same concept may be easier to grasp and would like to share it here.

Just press the big play button to begin:

This movie can be found at Toufee.com

If you have hard time following the movie, here is the transcript with details:

• $10,000 — We start out with $10,000 on January 1, 1997.
• $22,129 — If we invested $10,000 in the S&P 500 index fund, this is what we have 10 years later on January 1, 2007 (based on historical data from Yahoo! Finance). This assumes:
  • Our performance is 100% identical to the S&P 500. Most index funds slightly underperforms the index.
  • No yearly expense fees. Normally, we would lose another 0.3-0.5% of the total amount per year.
  • No taxes. Normally, we would have to pay tax on the fund distributions yearly, at our normal tax rate.
  • All distributions were reinvested
• $20,310 — This is what’s left after we paid 15% long-term capital gains tax, or $1,819.
  • Formula: $22,129.17 - 15% * ($22,129.17 - $10,000)
• $15,963 — Equivalent value of 1997 dollar, after we adjusted for the 27.23% inflation rate between January 1997 to January 2007.
  • Formula: $20,310 / 127.23%
• $15,171 — Equivalent value of 1997 dollar, after we adjusted for the 4.96% decline in the value of the U.S. Dollar.
  • Formula: $15,963 * (1-4.96%)
• $5,171 — Our real gain after we invested $10,000 for 10 years, or 4.26% CAGR.
• $7,470 — Equivalent value of 1997 dollar, if we simply kept the $10,000 under the mattress. We’d lost $2,530 for doing nothing!

I hope you enjoyed this post. Thanks.

Carnivals:

• This article was featured in the Carnival of Personal Finance #122 hosted by Mighty Bargain Hunter. For more information please visit the Carnival of Personal Finance.