Calculating Loan Reduction Strategies Using Inflation and Salary Growth

[tHeUnk0wn]

Current Salary=$80,000
Current Inflation Rate=3.6%

Use this rate to demonstrate that your salary will increase in relation to the inflation rate.

Background: This is a question from a home loan assignment where we have to prove how to reduce your loans using various equations to forecast number of repayments, nominal interest, etc.

Please help with this question. Even though it does sound simple, i am stumped on this one

 

[PeterO]

Current Salary=$80,000
Current Inflation Rate=3.6%

Use this rate to demonstrate that your salary will increase in relation to the inflation rate.

Background: This is a question from a home loan assignment where we have to prove how to reduce your loans using various equations to forecast number of repayments, nominal interest, etc.

Please help with this question. Even though it does sound simple, i am stumped on this one

Your salary will only increase if you are granted a pay rise ! ??

Do you mean show what your salary will become if your salary increases by the same amount as inflation ?

 

[tHeUnk0wn]

I think so

Well i would presume that as inflation increases you would naturally get a payrise but i'll give you all the information quoted from the assignment. Note: this is an assignment about Home loans and etc.

"Most people report that finding the money to make the repayments is a burden early in the loan but as they get closer to the end of the loan it is easier because their income increases in line with inflation."

Use this rate to demonstrate the truth of the above statement given that your salary over the course of the loan will increase with relation to the inflation rate

thanks for quick reply

 

[PeterO]

I think so

Well i would presume that as inflation increases you would naturally get a pay rise but i'll give you all the information quoted from the assignment. Note: this is an assignment about Home loans and etc.

"Most people report that finding the money to make the repayments is a burden early in the loan but as they get closer to the end of the loan it is easier because their income increases in line with inflation."

Use this rate to demonstrate the truth of the above statement given that your salary over the course of the loan will increase with relation to the inflation rate

thanks for quick reply

OK - the questioner wants you to assume your salary increases with inflation.

Hopefully you can calculate what your $80 000 salary would become over a lengthy period [a home loan is often 20 years or more]

What you are looking at is that your payments might be $3000 per month on your mortgage - that is $36 000 ; a considerable percentage of your $80 000 salary.

If inflation was to eventually double your salary to $160 000, you would still only be paying the $3000 per month, so $36 000 per year, and $36 000 is a much smaller percentage of your [now] larger salary.

Indeed, if you could guarantee that your salary would increase with inflation, people would be happy for inflation to be 20%, so your salary would quickly increase to $80 000 000 while your mortgage is still only $36 000 per year.

Much of the financial woes around the world have origins in salaries NOT increasing with inflation, especially for the workers; the CEOs and other management levels don't seem to have that problem.

 

[tHeUnk0wn]

So basically i assume that inflation would increase how salary increases with it and also show how much easier it is to make repayments based upon total salary.

 

[PeterO]

So basically i assume that inflation would increase how salary increases with it and also show how much easier it is to make repayments based upon total salary.

Effectively yes.

 

[tHeUnk0wn]

thanks for your replies