Why are we saving?

savetilibleed

RocketMan wrote: »

My wife and I are saving up for a deposit on a house that’s why were saving, house prices come down and it becomes harder to get a mortgage.


I'm curious back in the 80's when the base rate was ~14% can any one remember what interest rates they were getting on savings? I've looked but I can not find any details. I had a NatWest piggy account but I've no idea what rate it was, the Pigs were cool though.

All I know is when I took out a mortgage in 1985 it seemed that every month I was getting letters from the BS to tell me the interest rate was increasing. I remember my repayments increasing by £100 over that time even then, and it was a micro-mortgage, expecially by current standards. Savings rates? No idea, it was all going to the BS and insurance Co for interest payments and premiums :rolleyes:

harry_w

Personal Inflation Calculator
The Personal Inflation Calculator is an online tool that enables users to input their personal spending patterns to obtain an estimate of how their experience of inflation differs from the Retail Price Index.

My personal rate remains above 4%

The situation has changed since this was written, but it illustrates the variation in inflation rates for different classes in society:

Not inflation but living standards

30 June 2008
By Tom MacInnes
This month, inflation hit its highest rate for 16 years. As it rose above 3%, the Governor of the Bank of England, Mervyn King, was required to write a letter to the Chancellor, Alistair Darling, explaining why this had happened and what the Bank were going to do about it (link: http://news.bbc.co.uk/1/hi/business/7458209.stm).
But what would have most surprised the average reader was the news that inflation was so low. Anyone who has been to the supermarket recently will know that the cost of their weekly shop has gone up by far more than 3p in the pound. It may have led some to question the accuracy, or at least relevance, of the headline figure.
In fact, this measure, the Consumer Price Index (CPI), is not the only measure used by the government. The Retail Price Index (RPI), is used to uprate some pensions and benefits, including child benefit and incapacity benefit. Other benefits, such as Jobseekers Allowance and Housing Benefit, are uprated using a modified version of RPI, known as RPI-X.
The main difference between CPI and RPI is that the latter includes housing costs, most notably mortgage interest repayments. It also includes council tax and buildings insurance, excluded from CPI. Another measure, RPI-X, excludes mortgage and rent costs, but includes council tax and housing insurance. It stood at 4.4% in May.
Thanks to the Office for National Statistics' own Personal Inflation Calculator, individuals can now work out their own RPI based on how much they spend on 23 different categories of expenditure from food and clothing to housing. It also shows how this 'personal rate' has changed over the last few years compared with the headline figure.
Underpinning the calculations are the separate inflation rates that ONS calculate for each of the 23 categories. Looking at them individually is quite revealing. Take food, for instance. In May, the 12 month inflation rate for food was 7.8%. It was 4.8% in April last year, meaning that food prices have risen around 13% in the last two years.
Obviously this is a substantial rise, but it is not the only item that has increased markedly in the last two years. This May, the individual inflation rate for heating and lighting was 12.3%, and 9.1% last year. That means a 23% rise in two years. The cost of fuel for transport has risen by 18% in the last 12 months alone.
The most uneven changes are rises in the cost of mortgage interest repayments, which leapt from 5% to 15% in August 2006, before reaching 30% in August of 2007. They currently stand at 4%, having been at 22% this time last year. In effect, this means that mortgage interest payments have risen, on average, by around one third in the last two years. Even if the individual inflation rate for mortgage interest repayments was zero next month, the two year inflation rate would still be over 25% - any reduction in inflation now cannot undo the huge leap of the last year or so.
Elsewhere on the same ONS website, you can read the annual Expenditure and Food Survey report, this year celebrating its 50th anniversary. The EFS looks at how expenditure patterns vary across different types of British households.
One of the most interesting parts of the report analyses spending patterns by household income. What stands out from this is how the things that low income households spend their money on have usually gone up in price the most.

So among the poorest fifth of households, 16% of expenditure in 2007 went on food and non-alcoholic drink. By contrast, the richest fifth spent just 8% of their money this way.
Similarly, housing costs (excluding rent and mortgage costs), fuel and power accounted for 20% of spending among the poorest fifth, compared with 9% among the richest fifth. By contrast, big rises in transport costs hit the richest households more, since they spend more of their money on this than do the poorest fifth (15% compared with 8%).
We can combine the this data with the inflation calculator to try and get an estimate of an inflation rate for a low income household. the results are quite revealing as the show what a difference tenure makes. The graph below shows the inflation rate for two types of low income household over the last two years - one renting, one owning with a mortgage. For comparison, the national average (across all incomes and tenures) is included too. The figures are for RPI inflation.

Now, as in May 2006, there is little difference in the personal inflation rates of low income owner occupiers and renters. Nor do they differ greatly from the national average. But in the intervening period, the pattern was completely different. This time last year, the owner occupier household has a personal inflation rate of 7%, way above the national average of 4%, and almost twice as high as renters.
That the inflation rate today is back to 4% is of little consolation - over the last two years, a low income household with a mortgage has seen their cost of living rise by 11%.
This would all matter much less if such rises in the cost of living had been in any way matched by rises in average incomes. However, average incomes, in fact all incomes bar those of the very rich, have risen only modestly in recent years. This means that many people, certainly on low incomes but on average incomes too, have seen a rise in their cost of living.
This is the kind of issue that has political traction, and is surely one of the reasons the government is haemorrhaging support. Much analysis has focussed on the elimination of the 10p tax band, or the evident unfairness of bailing out mortgage lenders at a time of rapidly rising housing repossessions. These things resonate with voters when they personally feel less well off than they did a year ago. To a greater or lesser extent, everyone an relate, and it gives the government a huge problem.
The aim of both the Government and the Bank of England is to bring inflation back down to its target of 2%, but this not, by itself, going to make much difference to the population's financial wellbeing. The inflation rate is simply the increase in prices compared to the same time last year, so bringing inflation down merely stops things from getting worse. It does not redress the "hit" taken over the last year or two - the only way to do this is to allow incomes to catch up with rising prices.
Yet this is precisely what the Chancellor does not want to happen.

By manipulating interest rates the government has altered rates for different groups, relieving those with mortgages. The decline in oil prices since the commodity bubble popped with the crash has fed through to car-owners, but not been reflected in public transport or domestic fuel costs.

National Statistics Office:

Inflation
CPI down to 3.1%, RPI down to 0.9%


Annual inflation rates - 12 month % change
CPI annual inflation – the Government's target measure – was 3.1 per cent in December, down from 4.1 per cent in November.

Overall the reduction in the rate of VAT made the largest contribution to the 1.0 percentage point change in the CPI annual rate. There were also effects from a fall in the prices of petrol and diesel and from greater discounting in sales than last year. Eight of the 12 division-level categories made a large contribution to the slow-down in the CPI annual rate.

The category 'clothing and footwear' made the largest downward contribution to the change in the CPI annual rate. The reduction in the rate of VAT lowered the price of men's and women's clothing and footwear. Additionally, there was greater discounting of women’s clothing and footwear than last year. Overall the price of children's clothing fell by more than last year due to discounting in sales.

Transport costs made another large downward contribution. The largest effect came from the price of fuels and lubricants which fell this year but rose last year. The average price of petrol fell by 6.0p per litre between November and December this year, to stand at 89.2p, compared with a rise of 1.7p last year. Diesel prices fell by 6.4p per litre this year, to stand at 102.4p, compared with a rise of 3.0p last year. There was a partially offsetting effect from transport services where air fares, and to a lesser extent coach fares, rose by more than last year.

Further large downward contributions came from:

• recreation and culture
• furniture, household equipment and maintenance
• restaurants and hotels
• miscellaneous goods and services
• housing and household services, and
• communication

RPI inflation slowed to 0.9 per cent in December, down from 3.0 per cent in November. The main factors affecting the CPI also affected the RPI. Additionally, there were large downward contributions from mortgage interest payments and house depreciation which are excluded from the CPI.

RPIX inflation – the all items RPI excluding mortgage interest payments – was 2.8 per cent in December, down from 3.9 per cent in November.

As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate in November, at 4.1 per cent, was above the provisional figure for the European Union as a whole of 2.8 per cent.

The next publication date is 17 February 2009.

sabretoothtigger

I think one of the effects of this low interest rate is to deliberately encourage direct investment


True savers will have to bide their time, it might be that 10% interest rates return in the future. You could always try iceland interest rates or a guaranteed equity bond though neither is ideal.

Maybe someone who knows about funds can recommend an income fund.
I know even a tracker can be set to give dividends twice a year, ones I've looked at give about 4% yield but there must be better ones then that without too much risk of loss.

Theres no way I'd bother saving at 2% tbh but I think a minimum of 4% is available to anyone

456789

Mad_old_tory wrote: »

Pedantic maybe, but what have the government done to erode your savings? It's the Bank of England which has cut the interest rates and they are, regardless of what the conspiracy theorists may think, independent of the government.

Not completely independent 1) they have an inflation target set by the govt. which is supposed to be what they aim for with their decisions
2) nowadays they are also aiming to try and get more credit going which is what the government wants them to do

also like Brown handed overall control in 1997 I assume he can take it back too?

also the government let the banks etc. do whatever they liked for too long aswell....(subjective i know)

zarazara

all together now

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oh why are we saving?
whhyyy are we saaving?
oh, why oh, why, oh, why , ohhhhh, whyyyyyy?
why are we saving,
whhyyy are we saaaving?
da de da de da d ada, da de da da da da daaaa
..........................................

sh856531

2) nowadays they are also aiming to try and get more credit going which is what the government wants them to do

Its also what I want them to do but it does mean I control the MPC

john_s_2

sh856531 wrote: »

Clearly government and the banks themselves do share a fair amount of responsibilty for this whole mess, but at the end of the day, why is it governments job to force people not to act like total chimps?

And if they had stopped people, the accusations of 'Nanny State' would be legion.

cheerfulcat

RocketMan wrote: »

I'm curious back in the 80's when the base rate was ~14% can any one remember what interest rates they were getting on savings?

Yes - the best savings account circa 1989 was a Nationwide savings account paying 12%.

sh856531

Yes - the best savings account circa 1989 was a Nationwide savings account paying 12%.

Cripes!

Does that mean that people were essentially losing money having it in a savings account after inflation was factored in. I can't remember this far back but I know inflation was way higher than 12 during the 80s...

sabretoothtigger

The best deal I can remember was a tax free Tessa fixed at 10% for 5 years, long after the rates dropped that was such a good rate in 1996, think the limit was much less then isa is now though