1

I am from Sri Lanka and our banks give high interest rate for fixed terms (About 10% to 15%) and saving accounts. Therefore most of the people are invest money to bank and get interest for living.

I have check other countries and banks are not giving that much of interest rate for fixed terms and saving accounts. If people invest money to bank, need to invest much amount of money to get living spending money.

Reference: Interest Rate | World

  • Japan - -0.1%
  • Switzerland - 0.5%
  • Norway - 2.5%
  • Australia - 2.6%
  • Canada - 3.25%
  • US - 3.25%

Question: How they are living with small interest rate? Are they invest other methods or live just spending salary? If they invest to other things, what are these methods?

NOTE: I ask this question because our old parents live with bank interest (No Job & some parents no pension but have money in the bank). If parents come to live in low interest rate country, how they live?

4
  • I guess you need to have a lot of money in the first place, if you want to live off 10 % interest Oct 9 at 18:29
  • Central bank rates and rates for deposits, while may be correlated, are not the same. In the US you'd be very lucky to find a bank paying more than 2.5% for deposits now.
    – littleadv
    Oct 9 at 19:36
  • In a healthy economy, people make money by working. Otherwise, no products get made. (The US and EU are not healthy)
    – user253751
    Oct 10 at 14:31
  • The true fundamental is whether or not the bank interest rate matches the inflation rate. There are a lot of investors in any country that don't get a return as much as the inflation rate. I can get the inflation rate in the U.S. with TIP bonds but the principal of the bonds still needs to be hedged in a rising interest rate environment.
    – S Spring
    Oct 11 at 3:18

2 Answers 2

6

In a healthy economy, interest rates and inflation are somewhat linked, as central banks use interest rates (and some other things) as a tool to try to influence inflation (and a lot(!) of other things).

For example, while the EUR had zero and negative interest rates since 2012, it also had inflation rates as low as 0.1% to 2%.

So for the average user, an interest rate of -1% and inflation of 1% is not that much different than an interest rate of 10% and an inflation of 12%. If an apple costs 1€ today, with 100€, they can buy 100 apples now. Next year, they either have 99€ (-1% interest rate) and can buy 98 apples for 1,01€ each (1% inflation), or they have 110€ (10% interest rate) and can buy 98 apples for 1,12€ each (12% inflation).

So very simplified, the answer to How they are living with small interest rate? is that you can live independently from the nominal interest rate, if it has a healthy correlation to inflation and the economy. This does not consider the rest of the world, though. You may be able to pay for apples next year, but not for an iphone.

You seem to be interested in a situation where you just use the interest to live, but the logic is exactly the same!

Let's assume you have 120€ in the bank and need 10 apples per year to eat, at 1€ an apple. You take out the money for the food, and add the interest for the rest. And "10 apples" of course stand for whatever you need to live in that year, e.g. rent, food, energy or health insurance.

For -1% interest and +1% inflation, in the first year, apples cost 1€, so you use 10€ for food, and get -1,10€ interest on the remaining 110€, so you end up with 108,90€. And so on:

+------+------------+-------------+----------+-------------+
| year |  balance   | apple price | interest | EoY balance |
+------+------------+-------------+----------+-------------+
|    1 |  120,00 €  |  1,00 €     | -1,10 €  |  108,90 €   |
|    2 |  108,90 €  |  1,01 €     | -0,99 €  |  97,81 €    |
|    3 |  97,81 €   |  1,02 €     | -0,88 €  |  86,73 €    |
|    4 |  86,73 €   |  1,03 €     | -0,76 €  |  75,67 €    |
|    5 |  75,67 €   |  1,04 €     | -0,65 €  |  64,61 €    |
|    6 |  64,61 €   |  1,05 €     | -0,54 €  |  53,56 €    |
|    7 |  53,56 €   |  1,06 €     | -0,43 €  |  42,51 €    |
|    8 |  42,51 €   |  1,07 €     | -0,32 €  |  31,47 €    |
|    9 |  31,47 €   |  1,08 €     | -0,21 €  |  20,44 €    |
|   10 |  20,44 €   |  1,09 €     | -0,10 €  |  9,41 €     |
|   11 |  9,41 €    |  1,10 €     |    -     | -1,62 €     |
+------+------------+-------------+----------+-------------+

You run out of money in year 11.

Now let's do the same with 10% interest and 12% inflation.

In the first year, you start with 120€, apples cost 1€, you use 10€ for food, and get 11€ interest on the remaining 110€, so you end up with 121€. Nice! You spent less money than you earned. Seems sustainable, right? Let's see:

+------+------------+-------------+-----------+-------------+
| year |  balance   | apple price | interest  | EoY balance |
+------+------------+-------------+-----------+-------------+
|    1 |  120,00 €  |  1,00 €     |  11,00 €  |  121,00 €   |
|    2 |  121,00 €  |  1,12 €     |  10,98 €  |  120,78 €   |
|    3 |  120,78 €  |  1,25 €     |  10,82 €  |  119,06 €   |
|    4 |  119,06 €  |  1,40 €     |  10,50 €  |  115,51 €   |
|    5 |  115,51 €  |  1,57 €     |  9,98 €   |  109,75 €   |
|    6 |  109,75 €  |  1,76 €     |  9,21 €   |  101,34 €   |
|    7 |  101,34 €  |  1,97 €     |  8,16 €   |  89,77 €    |
|    8 |  89,77 €   |  2,21 €     |  6,77 €   |  74,42 €    |
|    9 |  74,42 €   |  2,48 €     |  4,97 €   |  54,63 €    |
|   10 |  54,63 €   |  2,77 €     |  2,69 €   |  29,59 €    |
|   11 |  29,59 €   |  3,11 €     |    -      | -1,61 €     |
+------+------------+-------------+-----------+-------------+

You again run out of money in year 11. So even if 10% interest rate looks much cooler than -1%, you do not necessarily get wealthier.

So, to emphasize the main point again that I tried to make earlier: you can live exactly as good or bad with -1% interest rate as with 10% rate, if the inflation increases accordingly. Do not get bedazzled by the high or low nominally value! It only has meaning in relation with inflation.

Also note that it is impossible to live off of interest indefinitely if the interest rate is lower than (your personal) inflation. If you have enough money to start with, it may however be longer than you live. But, again: a high interest rate alone does not mean that it does.

Nevertheless, a significant percentage of people does not live off of interest, but works for a living. Similar to interest rates, this turns out to break even if wages/pensions/social security increase with inflation (otherwise, only the rich stay rich, but the poor get poorer).

And investment decisions are, as always, based on evaluating risk and reward. The low interest rates (and low mortgage rates) probably shifted investments a bit to riskier instruments like stocks and real estate, but it is worth noting that people still bought government bonds with negative interest rates because it's less risk.

So much for the general idea, now to Sri Lanka:

The LKR lost 30-40% against Euro and USD since the start of the year, and the increased interest rate is one reaction to that (it was 4-5% before April 22). Also, inflation seems to be somewhere between 20% and 60% (although your personal rate may depend on what you are spending it on), and the current interest rate doesn't seem to cover this - but it is a special situation, and hopefully (for you and Sri Lanka), the economy stabilizes.

The current interest rate is an incentive for you to keep your money in the bank. If it is profitable for you (and if you can live off of it) compared to alternatives like buying apples or a house or a business or exchanging it to USD: you will know that in the future, just as with all other kind of investments. The nominal value of 10% interest rate is not a guarantee for that. And since that rate is set by the bank and not determined by market forces, it's also not an indicator for the risk that the market sees in that investment.

7
  • thank you for your information. I ask this question because our old parents live with bank interest (No Job & some parents no pension). If parents come to live in low interest rate country, how they live?
    – ind
    Oct 10 at 2:47
  • @ind the interest is 10%, right? So even if the interest was 0%, your parents could still take 10% of the money out of the bank every year, and live for 10 years. Banks are for keeping money, not making interest (sometimes they make interest, but not usually). If your parents lived in a rich country they might have 2 or 3 times as much money in the bank, from their wages, and then they could take the same amount they take now, for 20 or 30 years, with 0% interest.
    – user253751
    Oct 10 at 14:33
  • 2
    @ind Apparently, I didn't make my point clear enough, so I added an example for living off of interest with -1% and 10% interest rates, which work out exactly the same. I hope it clarifies it a bit more. The main point is (and you should ask again if it is still not clear): You can live exactly as good or bad with -1% interest rate as with 10% rate, if the inflation increases accordingly. Do not get bedazzled by the high or low nominally value!
    – Solarflare
    Oct 10 at 19:55
  • @user253751 you are correct, Considering a small economic country, parents depend on bank interests. When those parents come to a big economic country, they earned money not enough to live in that country considering monthly salaries. (When parents are working in Sri Lanka, get a small salary considering Australia salary) Now only have earned money for my old parents and when come to big economic country like Australia, that money is not enough. Therefore I looking for solution for that.
    – ind
    Oct 11 at 5:16
  • 1
    @ind Your question originally was/seemed to be that you understand how you can live off of 10% interest, but not how it's possible to do the same with -1% interest. I tried to answer that. Your current question in your comment is, paraphrased: How do you/your parents get rich enough so they do not have to work anymore. It should be obvious that, if there was a simple answer to that, 8 billion people in the world would just do that. If you are asking how people invest their money: I already answered, probably stocks or real estate. Is it enough? Depends on how much money you start with.
    – Solarflare
    Oct 11 at 7:49
2

In the United States up until 6 months ago bank interest rates were less than 1%. That meant that people didn't use banks accounts to generate funds to live off of. They saved for retirement by investing in the stock market, saved a little in the bank, and used the rest of their paycheck for current and near term expenses.

In the US this is considered normal. Even when bank interest rates were higher, there was a shift from using pensions for retirement to using tax deferred or tax exempt accounts to invest in the stock market to fund their retirement.

There has also been for many decades the use of real estate (home ownership) to build equity that can be used later in life.

4
  • thank you for your information. I ask this question because our old parents live with bank interest (No Job & some parents no pension). If parents come to live in low interest rate country, how they live?
    – ind
    Oct 10 at 2:47
  • 1
    @ind with money from their job. they put the money in the bank and when they want to spend the money they take it from the bank. It is simple.
    – user253751
    Oct 10 at 14:34
  • Considering a small economic country, parents depend on bank interests. When those parents come to a big economic country, they earned money not enough to live in that country considering monthly salaries. (When parents are working in Sri Lanka, get a small salary considering Australia salary) Now only have earned money for my old parents and when come to big economic country like Australia, that money is not enough. Therefore I looking for solution for that.
    – ind
    Oct 11 at 5:11
  • 1
    @ind This is nothing to do with interest. The question is simply about things being expensive in big economic countries. Even with 10% interest, because the Sri Lankan money is not very much in Australia, the 10% interest would be too small to buy things.
    – user253751
    Oct 11 at 10:33

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.