Fixed Rate vs. Variable Rate

“It’s not how much money you make,
but how much money you keep,
how hard it works for you,
and how many generations you keep it for.
— Robert Kiyosaki

Will your savings and investment plan make more money in 5 years with a fixed (guaranteed) rate of return or a variable rate of return when the fixed rate equals the 5-year average rate of return?

Shouldn’t the results be the same in 5 years? Let’s take a look at a comparison.

Example Assumptions
Beginning Balance: $0
Monthly Deposit: $500
Accumulation Period: 5 Years
Average 5-Year Rate of Return: 5.2%
Withdrawals: None
Taxes: Not Included
Inflation: Not Included

Fixed (Guaranteed) Rate of Return Result (5.2%)
Account Balance at the end of 5 Years: $34,257

Variable Rate of Return (Average = 5.2%)
End of Year 1 at 5% Rate of Return: $6,300
End of Year 2 at 3.5% Rate of Return: $12,731
End of Year 3 at 7% Rate of Return: $20,042
End of Year 4 at 4.5% Rate of Return: $27,214
End of Year 5 at 6% Rate of Return: $35,207

Your money will earn $950 more with a Variable Rate plan.

This example clearly shows that while a guarantee provides safety, accepting some risk will typically earn a higher Rate of Return over a period time.

The quickest way to double your money is to fold it in half
and put it in your back pocket.”
– Will Rogers

Top of page

Published by W. M. Brown

I am a retired U.S. expat living in Ecuador. I was a business owner for 32 years before retiring in 2012.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: