1. What is Cost of Money?

The Cost of Money represents the total expense associated with holding or borrowing money, combining both the interest rate and inflation rate. It reflects the real cost of capital over time, accounting for both the explicit interest costs and the implicit loss of purchasing power due to inflation.

2. How Does the Calculator Work?

The calculator uses the Cost of Money formula:

Where:

• \( Interest\ Rate \) — The percentage charged for borrowing money or earned on investments
• \( Inflation\ Rate \) — The percentage increase in general price levels over time

Explanation: This calculation helps investors and borrowers understand the true cost of capital by considering both the nominal interest expense and the erosion of purchasing power.

3. Importance of Cost of Money Calculation

Details: Understanding the total cost of money is crucial for investment decisions, loan evaluations, financial planning, and assessing the real return on investments after accounting for inflation.

4. Using the Calculator

Tips: Enter the interest rate and inflation rate as percentages. Both values must be non-negative numbers. The calculator will sum them to provide the total cost of money.

5. Frequently Asked Questions (FAQ)

Q1: Why add interest rate and inflation rate?
A: Because both represent costs - interest is the explicit cost of borrowing, while inflation is the implicit cost of holding money as it loses purchasing power over time.

Q2: What is a typical cost of money?
A: This varies by economic conditions. In stable economies, it might be 3-6%, while in high-inflation environments it can exceed 10-15%.

Q3: How does this affect investment decisions?
A: Investments should ideally yield returns higher than the cost of money to generate real wealth growth after accounting for both interest costs and inflation.

Q4: Is this the same as the real interest rate?
A: No, the real interest rate is typically calculated as nominal interest rate minus inflation rate, while cost of money adds them together to show total expense.

Q5: When is this calculation most useful?
A: Particularly valuable for long-term financial planning, evaluating loan terms, and comparing investment opportunities in different economic environments.