I'm trying to better understand the time-value of money and how to compare interest rates vs. investment returns.
In general, if I can pay for something in cash or short-term credit (paid off monthly), I do so. I also try to save up through high-interest savings accounts and diverse investments.
I understand vaguely that some low-interest rate loans are worth paying the interest on, because the money I keep in the meantime can grow through investments. Hypothetical example: if I buy a BigWidget using a loan with 12-month deferred payment then a 2% interest rate for another 24 months, that leaves me with cash to invest and earn 5% return over the 36 months, and then I walk away with more savings than if I just paid for the BigWidet in cash. Is that right?
I also think of inflation being a factor. If an investment has a return of 5% but inflation (increase in my cost of living) is also 5%, I basically got no return, and if that money was saved as cash I would be losing value to inflation. How do loans with fixed interest rates factor into this? In that same scenario, if I could take on a loan with a fixed interest rate of 2.5% for 12 months and inflation is 5% over those 12 months, do I effectively dodge half of the value lost to inflation?
Trying to understand how to best use cash on hand, when I have options to a) invest, b) take favorable loans on spending, or c) simply sit on it as cash.