Savers you've never had it so good?

MSE_Martin · 17 February 2009 at 12:43PM

Shock news for SAVERS.
If inflation's at 0.1% you’ve never had it so GOOD!

Inflation's nosediving as the economy plummets, so savers must fundamentally change their thinking, to deal with the new savings reality. I hope my shocking, but not wholly inaccurate headline’s grabbed your attention, so please read & think about this...

Interest can't be considered in isolation, its interaction with inflation's crucial. In these three scenarios, I’ve done the maths over a year to make it easier to understand, though really things change monthly. Also I've used RPI inflation which for many isn't accurate - see below.

July 08. Top Savings 6.5% . Inflation (RPI) 5.0%. Save £1,000 for a year and after basic tax you get 5.2% interest ie you’d have £1,052. Yet a basket of goods that cost £1,000 would now cost £1,050 due to inflation. Thus saving only increased your spending power by £2. REAL interest: 0.2%.

Current: Top Savings 3.5%. Inflation (RPI) 0.1%. Save £1,000 for a year and after basic tax you get 2.8% interest ie you’d have £1,028. A basket of goods that cost £1,000 would’ve only increased to £1,001 due to inflation. Thus saving increases your spending power by £27. REAL interest: 2.7%.

Possible future: Top Savings 1.5% Inflation (RPI) -2.0%. Save £1,000 for a year, and after basic rate tax you get 1.2% interest, ie £1,012. Yet a basket of goods that cost £1,000 would have DECREASED to £980 due to deflation. Thus saving’s increased your spending power by £32, meaning your REAL interest: 3.2%.

Is inflation really that low?

While RPI is 0.1%, the CPI rate which excludes mortgages is currently 3%. This variance has a huge impact on the numbers above, so do check your personal inflation rate. For some, who have very high rates, sadly you'll realise your money's doing even more badly that it seems right now. Yet hopefully at least this has explained the concept.

What about those living off savings income?

This is where it really has to hit home. Many have entrenched, psychological “don’t spend your capital" rules. Yet we may need to change that in coming climes. If we do get a true low interest deflationary environment, you CAN spend some capital to live off, without diminishing purchasing power – and in fact if you need to, you should.

My great worry is people will unnecessarily take hugely decreased lifestyles or even risk heat and food to protect their capital.

Max your interest Top Savings, Top cash ISAs

PS. I posted an earlier draft version of this and asked regular Forum users for feedback, as it's a thought piece. There were many useful and thought provoking comments (and a few rude ones as always). I've incorporated tweaked, and tidied the note above. Thanks to all for your help.

[threadbanner]box[/threadbanner]

nzseries1 · 17 February 2009 at 12:52PM

I'm still confused as to the difference between CPI (3%) and RPI (0.1%).
Thanks very much for the figures though, Martin, they are reassuring.

Rose_Crow · 17 February 2009 at 12:54PM

Thanks Martin - very interesting reading and certainly food for thought

anselld · 17 February 2009 at 12:54PM

RPI is a reasonable measure for those with mortgages, however many savers have not benefited from falling mortgage rates, either because they are on a fixed rate or they don't have one. For them a better inflation measure is CPI or RPIX, both in 3% territory. This tips the balance significantly.

It all depends, as you say, on your circumstances.

MSE_Martin · 17 February 2009 at 12:58PM

anselld wrote: »

RPI is a reasonable measure for those with mortgages, however many savers have not benefited from falling mortgage rates. For them a better inflation measure is CPI or RPIX, both in 3% territory. This tips the balance significantly.

It all depends, as you say, on your circumstances.

Good point. I tried to avoid debates on inflation rates - hence linking to the personal inflation calculator. For me the key is to educate people that you can't look at savings rates in isolation from inflation rates.

Wookey · 17 February 2009 at 1:01PM

I personally feel that retail prices are still to high, after the fuel escalation we seen during the first 8 months of last year just about every retailer jumped onto the price rise bandwagon, now that fuel has returned to roughly where it was those same retailers still haven't returned there prices to similar levels. Untill the prices return it certainly wont feel like we have more spending power.

anselld · 17 February 2009 at 1:02PM

MSE_Martin wrote: »

For me the key is to educate people that you can't look at savings rates in isolation from inflation rates.

That is certainly very true and not well covered in the press to date.

Lokolo · 17 February 2009 at 1:07PM

As a student I only buy basic things such as food, pay for bills etc. which means my actual inflation is around 5%.... I am losing out

themanbearpig · 17 February 2009 at 1:09PM

Except inflation isn't really 0.1% is it?
Its 3.0%, as we have been using CPI for years.

Good post though, as it is imporatant to relate interest rates to inflation.

KingL · 17 February 2009 at 1:13PM

It's interesting to see the breakdown of what elements contribute what proportions : http://www.statistics.gov.uk/PIC/downloads/PriceSubIndices.pdf

Decadent_Fool · 17 February 2009 at 1:20PM

I hope this starts to draw a line under the savers problems, and we can work towards solutions to their problems instead of just bemoaning the current situation

Savers you've never had it so good?

Comments

Confirm your email address to Create Threads and Reply

🚀 Getting Started

Categories

Is this how you want to be seen?

Get our FREE Weekly email full of deals & guides - and it’s spam-free