Scared of exceeding PSA

zagfles

Thumbs_Up said:

What is life? Life is money, without no money their is no life. I have given this subject some scholarly thought. So how will I beat the bogeyman aka inflation? To my thinking its a 3-way game bit like the hand game rock paper scissors. To explain this I’ll have to dumb this down a bit and quote my 2nd favorite film title regarding wealth preservation -

Good: Compounding interest and In pensions we trust.

Bad: Labour's  chancellor of the exchequer. Some hyped up fund managers.

Ugly: Inflation.

So, 3 years ago I had £477,000, today £500,0000, this magical trick is done by compounding. I will be told (correctly) my cash has lost it’s true value due to inflation. But for me personally has it? 

3 years ago 477k wouldn’t buy me a 3 bedroom semi-detached house, today it will. Next year 477k will buy me a 4 bedroom detached house. My way of thinking I have gained £23,000 and kick the bogeyman into touch. Good morning.

 

Well done you've beaten the system! Yes CPIH is lower than CPI inflation. House prices are falling, at least relative to general inflation. If you're looking to buy a house or move upmarket, your cash may even have increased in value. But if you're looking to downsize, you're doubly hammered by high general inflation and low/negative house price inflation. But it's good for the kids so I'm all for it

zagfles

SonOfPearl said:

Interesting discussion. There are two figures that really matter to me. 1. my annual expenditure and 2. my annual income, which is entirely from savings interest*. As interest rates and inflation have risen substantially over recent times, my annual expenditure has increased but my income from my savings interest has increased much more. This is because I am fortunate to have savings that are more than 20 times my annual expenditure. 

I understand that the real interest rate is the nominal interest rate less inflation, but due to my low living costs and significant savings I am definitely benefiting from higher interest rates despite even higher inflation. 

* I also have investments, but they are growth funds, not income funds. 

What about your future income?

Higher interest rates this year will get you a higher income this year. High inflation this year will increase your expenditure not only this year but every year in the future even if inflation drops to zero next year. High inflation in future years compounds your expenditure increase.

Someone in 1970 with £20k of savings would have considered themselves filthy rich. At 5% interest they'd earn £1000, more than the average wage. They'd be as happy as a pig in muck.

By 1980, if that's all they had, they'd likely be living like a pig in muck.

SonOfPearl

zagfles said:

High inflation in future years compounds your expenditure increase.

And high returns on my savings will also compound in future years. 

zagfles

SonOfPearl said:

zagfles said:

High inflation in future years compounds your expenditure increase.

And high returns on my savings will also compound in future years. 

Only if you reinvest it all! Then they'll both compound and whichever is higher on average over the long term wins.

You said "I am definitely benefiting from higher interest rates despite even higher inflation"

No. You. Are. Not. You are losing money. Your capital is losing value even if you spend nothing and reinvest every single penny.  

If inflation is 8% and interest is 6%, even if you reinvest it all and don't spend a penny, your investment is down in value. And if you spend any of it, you're basically spending capital which increases your capital loss.

Of course you might be happy for your capital to reduce in value. That might not be an issue for you. But whether it reduces by it being spent or by inflation, it's still being reduced. That's the point.

A scenario of 1% interest and 2% inflation is always better for savers than a scenario of 6% interest and 8% inflation.

Dazed_and_C0nfused

zagfles said:

SonOfPearl said:

zagfles said:

High inflation in future years compounds your expenditure increase.

And high returns on my savings will also compound in future years. 

Only if you reinvest it all! Then they'll both compound and whichever is higher on average over the long term wins.

You said "I am definitely benefiting from higher interest rates despite even higher inflation"

No. You. Are. Not. You are losing money. Your capital is losing value even if you spend nothing and reinvest every single penny.  

If inflation is 8% and interest is 6%, even if you reinvest it all and don't spend a penny, your investment is down in value. And if you spend any of it, you're basically spending capital which increases your capital loss.

Of course you might be happy for your capital to reduce in value. That might not be an issue for you. But whether it reduces by it being spent or by inflation, it's still being reduced. That's the point.

A scenario of 1% interest and 2% inflation is always better for savers than a scenario of 6% interest and 8% inflation.

I understand that's correct but I suspect an awful lot of people see 6% as (clearly) better in simple cash terms compared to getting 1% and everything after that passes them by for one reason or other.

subjecttocontract

Surely the inflation figure is an average of the specific items included in the calculation ?
Not everyone will be a user, buyer, consumer of all of those specific items.
Therefore, everyone's exposure to inflation is different and the result has a different impact on individuals.

SonOfPearl

zagfles said:

SonOfPearl said:

zagfles said:

High inflation in future years compounds your expenditure increase.

And high returns on my savings will also compound in future years. 

Only if you reinvest it all! Then they'll both compound and whichever is higher on average over the long term wins.

You said "I am definitely benefiting from higher interest rates despite even higher inflation"

No. You. Are. Not. You are losing money. Your capital is losing value even if you spend nothing and reinvest every single penny.  

If inflation is 8% and interest is 6%, even if you reinvest it all and don't spend a penny, your investment is down in value. And if you spend any of it, you're basically spending capital which increases your capital loss.

Of course you might be happy for your capital to reduce in value. That might not be an issue for you. But whether it reduces by it being spent or by inflation, it's still being reduced. That's the point.

A scenario of 1% interest and 2% inflation is always better for savers than a scenario of 6% interest and 8% inflation.

Thank you. I just worked it out with actual figures and you're quite right. Logically that makes sense. Nonetheless, I can sustain the loss in real value of savings overall, and the short-term increase in income is very welcome. Even if the rate of inflation stayed higher than interest on my savings for the foreseeable future (highly unlikely!) by the time I felt the impact my DB pension would have started. 👍

zagfles

Dazed_and_C0nfused said:

zagfles said:

SonOfPearl said:

zagfles said:

High inflation in future years compounds your expenditure increase.

And high returns on my savings will also compound in future years. 

Only if you reinvest it all! Then they'll both compound and whichever is higher on average over the long term wins.

You said "I am definitely benefiting from higher interest rates despite even higher inflation"

No. You. Are. Not. You are losing money. Your capital is losing value even if you spend nothing and reinvest every single penny.  

If inflation is 8% and interest is 6%, even if you reinvest it all and don't spend a penny, your investment is down in value. And if you spend any of it, you're basically spending capital which increases your capital loss.

Of course you might be happy for your capital to reduce in value. That might not be an issue for you. But whether it reduces by it being spent or by inflation, it's still being reduced. That's the point.

A scenario of 1% interest and 2% inflation is always better for savers than a scenario of 6% interest and 8% inflation.

I understand that's correct but I suspect an awful lot of people see 6% as (clearly) better in simple cash terms compared to getting 1% and everything after that passes them by for one reason or other.

This is true and I wouldn't even attempt to have this sort of discussion on any other social media, generally people are clueless about finance and I would expect it to go right over their heads. But regulars on MSE are usually far more clued up about finance, it is depressing that even some regulars here just don't seem to get it.

Martin summed it up 13 years ago:

https://www.moneysavingexpert.com/news/2010/07/no-savings-exists-theyre-all-losings-accounts/

and what he wrote then has remained true right up to now. Inflation has remained higher than "savings" rates for the last 13 years. So anyone in cash hasn't had a savings account, they've had a "losings" account.

The tide may be turning at last, inflation is falling and interest rates are off the rock bottom they've been on since the financial crisis in 2008. So next year may mark the end of the "losings" decade and a bit. We'll see. But even then, if people spend more than [interest rate minus inflation] (approx) they're effectively spending capital. May not be a issue for some, but they need to understand that's what they're doing.

Qyburn

Bigwheels1111 said:

I now have enough savings to provide me with a better income than I have ever had in my life until I’m 80+ and senile. If all goes to plan I will still have my capital.

Making a guess at rate of inflation, how much will that £13K be worth when you're 80, and how much will your capital be worth? Five percent inflation knocks it down to 61% in 10 years

subjecttocontract

But many people do beat inflation if they spend their money on items that are :
a) not included in the list of items that make up the inflation figures.
b) those items increase in value above the inflation rate.