Savers you've never had it so good?

john_s_2

red_bertie wrote: »

I sent a snotty feedback email about that gov website. Trouble is they are so far up the own b*ms, they don't aim it at real dummies [no offence] and KIS.

KIS=Keep it Simple?

ONS isn't the easiest site to navigate, I'll be the first to admit. At the end of the day though, if something is complicated then you can't explain it in very simple terms.

uih039

gozomark wrote: »

OK. lets take someone with 100,000 in savings

scenario A - inflation 10%, interest rates 10% -how much can they spend and maintain their capital ?

scenarion B - inflation 0%, interest rates 2% -how much can they spend and maintain their capital ?

is a saver better off in A or B ?

those who agree with Martin will say
0,
2,000
and B.

I guess some of those who don't agree with Martin will say
10,000,
2,000
and A

And let’s extend this idea to try and illustrate the issue even more.

I’m going to ignore compound interest and compound inflation – it makes no difference to the final outcome.

You have savings of £100,000 and you want to buy a Ferrari which today costs exactly £100,000. However, as there is a credit crunch you think this is unwise so you are going to wait before buying.

You decide to wait for 10 years because you are very prudent and you save the money.

Under scenario A, you will have £200,000 in the bank and the Ferrari costs £200,000. You buy the car and have nothing left.

Under scenario B, you will have £120,000 in the bank and the Ferrari cost £100,000. You buy the car and have £20,000 left.

If not a Ferrari, then a house, food, holidays...anything.

Is scenario A or B better?


Andrew.

john_s_2

uih039 wrote: »

Under scenario A, you will have £200,000 in the bank and the Ferrari costs £200,000. You buy the car and have nothing left.

Under scenario B, you will have £120,000 in the bank and the Ferrari cost £100,000. You buy the car and have £20,000 left.

Is scenario A or B better?

Scenario A is better. The person who had scenario B spent some of his 20K on petrol, took the car out for a spin, and wrapped it round a lamppost :-)

uih039

john_s wrote: »

Scenario A is better. The person who had scenario B spent some of his 20K on petrol, took the car out for a spin, and wrapped it round a lamppost :-)

:rotfl:

But at least under scenario B he had most of the 20k left to pay for repairs and, of course, the cost of repairs would be much less (in real terms) than under scenario A.

kittykitten

Ok, I've worked my way through the entire thread, it's taken me 30 minutes and all I've learned from pages 2-8 that I didn't learn from page 1 is that there are even more mathematically illiterate people out there than I realised!

I'm not trying to criticise anyone for their maths skills (or lack of) as if you've never been taught this before it could take a while to get the hang of it. Personally I understood from Martin's article, despite having never been taught the logic of real capital vs inflation, but this may be because the examples given by people seem real to me - I understand real life scenarios.

I do wonder if people perceive this situation differently according to how much capital they have? It must seem much less daunting to dip into your capital slightly if you have £300k sitting in the bank, as opposed to £3k, regardless of the fact that it's all relative.

At the same time I can understand why some people, particularly the older generation, would struggle with the concept of spending their capital, because, as someone pointed out earlier, nothing means nothing - when you've spent it you've spent it, end of story. This is the first time that older people have had this sort of situation to deal with - a combination of living longer and family separation leave more and more older people having to fend for themselves in terms of keeping a roof over their head.

Incidentally the whole care home fees debate is irrelevant anyway, as unless you were intending to invest your money in such a way as to pay for care home fees with interest plus have enough interest left over to continue to increase your capital in line with inflation, eventually you'll run out of money and social services will fund your care anyway. I know it can be hard to spend on yourself what would previously have been earmarked as your offsprings' inheritance, but I personally (as someone who works in health and social care so sees this all the time) think this will very quickly become the norm - with the exception of those who die relatively young (ie old enough to have some savings, but too young to need care), we'll all be leaving less and less in inheritance because of the way we need to fund our care. People shouldn't feel guilty about spending money on their care - after all, they earned it in the first place!


OK, now I've had my bit rant, I'm going to throw another scenario into the mix: my own. Presently I live with parents (pay them rent, but this doesn't increase in line with inflation - doesn't actually increase at all as my mum refuses to take any more money from me!) earn a fairly decent wage, and before all the mortgage/house price disaster that was the end of last year, was starting to consider buying my own place. Anyone have an opinion on whether now is an ok time (I know it's not a good time, but just ok will do!) to be a first time buyer, or if I'd be wiser holding off for 6 months to see what happens?

LesU

uih039 wrote: »

And let’s extend this idea to try and illustrate the issue even more.

I’m going to ignore compound interest and compound inflation – it makes no difference to the final outcome.

You have savings of £100,000 and you want to buy a Ferrari which today costs exactly £100,000. However, as there is a credit crunch you think this is unwise so you are going to wait before buying.

You decide to wait for 10 years because you are very prudent and you save the money.


Under scenario A, you will have £200,000 in the bank and the Ferrari costs £200,000. You buy the car and have nothing left.

Under scenario B, you will have £120,000 in the bank and the Ferrari cost £100,000. You buy the car and have £20,000 left.

If not a Ferrari, then a house, food, holidays...anything.

Is scenario A or B better?


Andrew.

I think this encapsulates the whole argument. What if Ferraris, being very popular, bucked the 0% inflation trend and went up by 5% a year? Would you still buy at the end of the 10 years because inflation as measured by the Government is considered to be 0%, even though for Ferraris that isn't the case?
The whole argument, as I see it, depends on low volatility in the markets and commerce. In other words, what is happening today is likely to be the case next year or the year after. I'm not convinced that we can be that sure.

uih039

LesU wrote: »

I think this encapsulates the whole argument. What if Ferraris, being very popular, bucked the 0% inflation trend and went up by 5% a year? Would you still buy at the end of the 10 years because inflation as measured by the Government is considered to be 0%, even though for Ferraris that isn't the case?
The whole argument, as I see it, depends on low volatility in the markets and commerce. In other words, what is happening today is likely to be the case next year or the year after. I'm not convinced that we can be that sure.

Agreed. My example is intentionally very basic and is simply intended to support the principle of the opening post on this thread. Amongst other things it ignores variable personal inflation rates and, crucially, human nature. We are not always logical animals and every decision we make is not solely based on mathematics...thankfully!

If you toss a coin 50 times and it lands heads every time, we have all been taught that there is still a 50/50 chance that the next toss will also be heads. But isn't there something inside our little brains which says "after 50 tosses, this time it's almost certain to be tails"?

Androcles

john_s wrote: »

Blimey! This thread has moved on since I last read it.

Have we agreed on the inflation / savings thing yet? Or agreed to disagree?

As I understand it we may have reached the following conclusions, (he said tentatively!):

1. Your capital and any interest, and any other income will generate your purchasing power. This (your purchasing power) will vary over time according to the current rate of inflation/ deflation.

2. There are numerous measures of inflation and most of the official ones are arithmetic or weighted means of various prices of expenditure items and generally have been dreamed up to reflect different aspects of purchasing (i.e. mainly political spin.) The best rate of inflation to choose is the one which most accurately reflects your lifestyle and purchasing "choices" (given that you may not have much control oversome of those (Council tax, food and utilities for example).

3. There are four ways of developing your purchasing power; these are maintaining your capital (savings etc), maximising the interest your earn on these and any income you can generate, and reducing your level of spending.(Ignoring borrowing against assets.)

4. The important decision you must make is what degree of risk you are prepared to take with these, balanced against the standard of living you want to maintain and the need you have for purchasing power in the future.

5. This means that many retired savers on here may be looking at conserving capital, increasing interest where they can, and reducing expenditure, although how much they can afford to spend will need to take into account the income they have from all sources, the amount they are prepared to let their capital deplete by, compared to their their personal rate of inflation, i.e. it is not necessarily bad to spend some capital, provided it is to meet your financial targets in terms of the standard of living you want and resources you think you may need for the future. You can afford to run these down under one heading if you are balancing it against another, for example, so whilst interest may be low, relative rates may be higher due to reducing inflation.

6. Nobody should live as miserable as a beggar and leave a ton of cash to the state purely to maintain their capital at all costs- live a little!:beer:

unitedwestand

gozomark wrote: »

umm, thats not the point of this thread at all

Apart from the very bare essentials I have very little outgoings that will be subject to inflation. Food & energy (which I fixed last year) that’s it.
[FONT=&quot]
I’ve had no annual salary increase, no bonus & redundancy lurks around the corner. The last thing I want to do is spend.

[/FONT] [FONT=&quot]My saving interest rates have been slashed 6% in 12 months.

As a saver, how am I better off?[/FONT]

gozomark

unitedwestand wrote: »

Apart from the very bare essentials I have very little outgoings that will be subject to inflation. Food & energy (which I fixed last year) that’s it.

I’ve had no annual salary increase, no bonus & redundancy lurks around the corner. The last thing I want to do is spend.

[FONT=&quot]My saving interest rates have been slashed 6% in 12 months.

As a saver, how am I better off?[/FONT]

Along with much of the population, as a saver you are better off. As an employee you are worse off.