Scared of exceeding PSA

zagfles

SonOfPearl 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.

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 inflation stayed above interest for the foreseeable future (highly unlikely!) by the time I felt the impact my DB pension would have started. 👍

No problem, glad you've got it! As per previous post the tide may now be turning. But even then I'd regard any income up to the inflation rate as capital, as it's only maintaining the real value of the investment. If you want to and can afford to spend it, fine, but realise you're effectively spending capital not income.

BooJewels

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.

I can't speak for other people and their comprehension of economics, but I do fully grasp this concept - always have. 

I've done my own future projections with a number of inflation figures and average interest rates - in that I have a mix of fixes and EA, so note my average interest return at any time in amongst the data I keep in a spreadsheet.  I also know, for example, that if inflation averages 5% over the next ten years, I will need £1,628.89 to buy what £1,000 will buy me today - if it averages 3%, I'd need £1,343.92.   I also know what effect a relatively decreasing interest rate will have on possibly diminishing capital over the same period.  I've spent a lot of time putting numbers into tables to allow me to do quick calcs.

But am I going to fret about it as I move forwards - no, I'm just not.   Am I going to change my methods - probably not.

What I am trying to do is be sensible going forwards in not being profligate and keeping on top of my funds.  I live quite cheaply compared to many and am confident that my capital will see me out.  The trick is to ensure that it does and that I don't leave this world leaving too much of it behind at the expense of not living a decent quality of life because I'm obsessed with keeping hold of my money.

Everyone has to do what allows them to sleep at night - I'm very happy with the decisions I've taken.  I don't care two hoots if other people approve or not.

zagfles

subjecttocontract said:

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.

This is true, but in the long run different inflation rates on different items tend to average out. There are some exceptions, for instance stuff like short haul flights and technology have gone down in price long term, whereas stuff like houses, leisure activities etc have generally increased faster than general inflation.

But the sort of stuff that's fed general inflation recently has been stuff that affects virtually everyone (even if indirectly) for instance energy prices, food prices, council tax etc.

There are various sites where you can try to work out an individual inflation rate, but I'd wager for most people it won't be far off measures like CPI/CPIH/RPI over the mid/long term.

Noneforit999

My Wife and I have both exceeded it this year due to inheritance money, not much we could do about it. Even after sticking £40k into ISA’s, the remainder left us well over the allowance with me being a 40% tax payer.

Guessing my Tax code is going to take a massive dive next April to recoup it. 

zagfles

Noneforit999 said:

My Wife and I have both exceeded it this year due to inheritance money, not much we could do about it. Even after sticking £40k into ISA’s, the remainder left us well over the allowance with me being a 40% tax payer.

Guessing my Tax code is going to take a massive dive next April to recoup it. 

There are various other tax free/low tax and low risk ways round it, for instance premium bonds, buying low coupon gilts (been a few threads on that here).

TheWoodler

Spot on @BooJewels. My approach and thinking entirely (and like you in your previous post, I’d give it back to have my loved ones back).

There’s been research done into cuneiform tablets that demonstrates inflation in ancient Babylon. It’s not a new problem at all. 

zagfles

TheWoodler said:

Spot on @BooJewels. My approach and thinking entirely (and like you in your precious post, I’d give it back to have my loved ones back).

There’s been research done into cuneiform tablets that demonstrates inflation in ancient Babylon. It’s not a new problem at all. 

Yet most people still don't seem to understand it

masonic

subjecttocontract said:

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.

It's well worth collecting your own expenditure data in order to know your personal rate of inflation. Thirteen years of data has suggested to me that I experience below average inflation vs even CPI. This takes the pressure of investment returns somewhat.

zagfles

masonic said:

subjecttocontract said:

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.

It's well worth collecting your own expenditure data in order to know your personal rate of inflation. Thirteen years of data has suggested to me that I experience below average inflation vs even CPI. This takes the pressure of investment returns somewhat.

Interesting - is that based on the actual price of things you buy, or just on how much you spend?

The latter is easy and possibly useful, but tells you nothing about inflation. For instance you could just be consuming less, loads of reasons eg kids moved out, retired and so cheaper holidays, savings on work related expenses etc.

Variable expenditure through life isn't inflation (or deflation), otherwise we and probably most people had massive deflation during 2020 and then massive inflation in 2021/2 And it tends to be lumpy, eg changes when kids move out, or retirement, maybe getting less mobile (for some it may increase expenditure eg using taxis instead of car/bus, for others it may reduce it, eg if they don't go anywhere). But it can't be assumed to be a linear trend that will continue.

masonic

zagfles said:

masonic said:

subjecttocontract said:

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.

It's well worth collecting your own expenditure data in order to know your personal rate of inflation. Thirteen years of data has suggested to me that I experience below average inflation vs even CPI. This takes the pressure of investment returns somewhat.

Interesting - is that based on the actual price of things you buy, or just on how much you spend?

The latter is easy and possibly useful, but tells you nothing about inflation. For instance you could just be consuming less, loads of reasons eg kids moved out, retired and so cheaper holidays, savings on work related expenses etc.

Variable expenditure through life isn't inflation (or deflation), otherwise we and probably most people had massive deflation during 2020 and then massive inflation in 2021/2 And it tends to be lumpy, eg changes when kids move out, or retirement, maybe getting less mobile (for some it may increase expenditure eg using taxis instead of car/bus, for others it may reduce it, eg if they don't go anywhere). But it can't be assumed to be a linear trend that will continue.

It is based on my own basket of goods and services that I consume. Although the figure based on spending doesn't differ by much as I am a creature of habit and simple pleasures, and was classed as a key worker during Covid.