Remembrance Day and the impact of inflation

remembrance-day

It’s Remembrance Day; a time to reflect on the incredible sacrifices made by all those who made the ultimate sacrifice for the liberty we enjoy today.

I have a personal connection to this annual event through my grandfather, who served on HMS Ulster during World War II, taking part in 3 invasion landings (including D-Day itself), so I wanted to use this platform to pay homage to all those involved in the small way I can.

So let’s take a look at how inflation has affected our spending since the Armistice in 1918…

Item

Average price in 1918 (£)

What is that worth in 2019 (£)

House

195

12,188

Fuel (per litre)

0.44

2.49

Average salary

133

8,303

Car

250

15,625

Bread (loaf)

0.02

1.00

Milk (1 pint)

0.06

3.75

Bacon (400g)

0.12

7.25

Put simply, inflation effectively shrinks the buying power of our money over time.

In order to counteract this, we must attempt to at least equal the rate of inflation with how much money our savings are making us in the long term through interest earned or market gains.

Inflation can be particularly harmful if our money is just sat in a fixed income bond or low or no interest account doing nothing.

Let’s see how that impacts £10,000 sat in a cash account over a number of years (assuming a 0% growth rate on your money and the 2018 inflation average of 2.48%)…

Amount of years left in 0% account

What that £10,000 is worth now

1

£9,756.10

5

£8,838.54

10

£7811,98

25

£5,393.91

In just 25 years your money could be worth almost half of its value if left doing nothing.

Obviously, this is slightly exaggerated as the majority of savings accounts will earn you at least a little interest, and the inflation rate may decrease across those 25 years.

But, then again, it may increase; inflation reached over 25% in the 1970s due to rising oil prices and a rise in wages thanks to the considerable power unions used to wield in that time period.

So what can we do to prevent our savings being eroded by inflation?

Long term investment funds

These can come in a variety of forms, but the most recommended amongst the finance blogging community would probably be the low-cost, global index equity trackers.

Many studies have been conducted that show holding these over a 10/20/30+ year period will outperform any active fund or stock picker, whether professional or retail.

Picking ‘the winner’ out of all the companies in the world is a difficult thing to do, and something many professionals even consistently fail at: just take a look at the mess of a situation Neil Woodford has found himself in this year. 

The common theory of holding a passive tracker allows you to ‘buy the market’ (have a holding in every company within that index) and is often the best approach to start with for the majority of retail investors to beat inflation over the long term.

High interest debit accounts

These are something I don’t bother with, but definitely useful in the short term nonetheless.

Many banks offer higher rates of interest on fixed amounts held in their debit account as long as minimum requirements are met with direct debits and regular minimum monthly amount are made to the account.

These can be beneficial for smaller savings amounts and if you don’t want to lock your cash away for the long term like you would have to with index trackers.

NS&I index linked savings certificates

These are products offered by NS&I (the same lot that offer Premium Bonds). The accounts are linked to the Consumer Price Index (CPI) that calculates price changes for each item in a predetermined ‘basket of goods’ and averaging that price.

These are, in theory, great for keeping your savings in line with inflation but if inflation falls to a low level, then there may be better financial products out there that will give you a better rate.

Utilising the Lifetime ISA 25% bonus

If you know you’re definitely going to be buying a house in the near future, it might be worth opening yourself a Lifetime ISA (LISA).

These accounts allow you to deposit up to £4,000 a year with the government topping that up with a 25% bonus (up to an extra £1,000).

Receiving 25% on your cash is better than anything you’ll receive in any savings account and gives you a much higher rate than current inflation, but the LISA does come with some caveats.

You cannot withdraw the money from the account until you’re either 60 or unless it’s being used for a deposit as a first-time buyer. Withdrawing for any other reason will result in a considerable penalty fee.

This may also not be the best option in the long term if held in a ‘cash’ LISA account, as there may be better options for the long term.

*

Hopefully that’s given you the motivation to take a look at the interest rate your savings are currently earning you, and to move your money to another financial vehicle if you’re not happy with what you’re getting in order to start making your money working harder for you.

 

 

Sources:

https://www.hillarys.co.uk/back-in-my-day/

https://www.rl360.com/row/tools/inflation-calculator.htm

https://www.economicshelp.org/blog/2647/economics/history-of-inflation-in-uk/

https://monevator.com/passive-investing-uk-evidence/

https://www.investopedia.com/terms/c/consumerpriceindex.asp

9 thoughts on “Remembrance Day and the impact of inflation

  1. “You cannot withdraw the money from the account until you’re either 60 or unless it’s being used for a deposit as a first-time buyer. Withdrawing for any other reason will result in a considerable penalty fee.”
    Not quite true.
    You get a 25% bonus on up to £4000 per tax year and if you need to access it early (but not buy a house) then you get a 25% penalty.
    £4,000 + 25% = £5,000 and £5,000 – 25% = £3,750
    £3,750 / £4,000 = 93.75% or a 6.25% loss
    So that is a penalty but given that you only need to pay that penalty if you access the money before 60 – a young person might think it’s worth the bet. If you need the money early you lose 6.25% but if you don’t and can hold on you gain 25%. For an (aspiring) early retiree it can be a good product – afterall it is a free £1000 every year!

    Liked by 1 person

    1. That’s very true, I should have gone into a little more detail. The penalty fee isn’t as bad as it initially seems, but it’ll still have quite an impact you have a considerable amount in the account.
      I’m a big fan of the LISA despite the criticisms of a lot of the major high street banks!

      Like

  2. It should form part of anyone’s FI plan – £1000 (per person per year) free from the government accessible at 60.
    Part of the UK’s funny policy to make it easy for those with moderate levels of invest able income – £20k ISA allowance? it’s a huge amount but only a few % could actually utilitise it.
    A few years of filling your ISAs will mean tax free, CGT free income, available to everyone!

    Liked by 1 person

  3. NS&I index linked certificates were closed to new savers in 2011, but any existing certificates have continued and can be rolled over at maturity.

    Like

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