Money

Posted on 2007/07/30 23:37:37 (July 2007).

[Monday 30th July]
I wasted this evening reading all about savings and interest rates and all that nonsense. It's hardly really worth it is it?

I found my national savings account book with the last balance in it at £6.54 in 1992. I got momentarily excited about this, until I worked out the pathetic effect of interest over time. Even if the interest rate on that account is as good as 5% (which it probably isn't) that will basically have just doubled in value to 13 measly quid.

In 1992 the average price of a pint of beer in the South East was £1.40. Now it must be at least double that.

So in short I could have bought 4-and-a-bit pints of beer with that money back in 1992 (despite the slight hindrance of being underage) or 4-and-a-bit pints of beer with it now in 2007. Drinking four pints of beer at age 15 would have probably lead to some cherished teenage memories (actually it wouldn't, I could never have got served prior to being 18, but bear with me) whereas now that would just be a routine and unremarkable visit to the pub.

Boy am I glad I kept that money in a savings account.

You bloody well should!! You almost doubled the stating sum in 15 years, which means that the return has been far greater than 5% x Year, I mean what do you expect from a savings account?!??!

Posted by Lox at 2007/07/31 23:31:28.

Erm, no Lox - the interest rate doesn't have to be greater than 5% to double your capital over 15 years. The effect is compound, remember - so the net effect is 1.05 to the power 15, which is roughly 2.079.

My point was that that doubling your original investment is no great achievement when it takes 15 years to do so - for some important consumables (beer, houses) prices have risen well above inflation (currently about 2.5% here in the UK), and so you can only really buy the same things now as you could have done 15 years... so what is the point?

I feel strange explaining financial concepts to someone with a degree in economics!

Posted by John at 2007/08/01 09:24:32.

10% over 15 years would make your original investment grow by 4 times, but it is of course non-linear, so at 15% over the same period it would grow 8 times, and 20% gives you almost 16 times growth.

However, this is all somewhat academic, 15 years ago I was 15 years old. At this time gathering together 1000 pounds for saving would have been a nigh-on impossible task, and let's say I managed to find a savings account which offered 10% interest. Well after repeating my whole life up to that point (a roundabout way of saying 15 years later) I'd then today have 4000 quid in a bank somewhere, which isn't exactly a vast sum. It might pay for part of a modest deposit on a house about a 3 hour commute away from London in an area where my windows would be smashed by the local hoodies on a nightly basis.

So all that effort to scrape together the money in the first place, and then 15 year (half my life to date) waiting, for a sum that would just be immediately set fire to in an attempt to buy a house.

My great grandparents never saved money and never bought property. They did however go on lots of nice holidays, ate out a lot, and generally thoroughly enjoy their lives. I think they really had the right idea.

Posted by John at 2007/08/01 09:36:01.

Now might be a good time to consider future savings.

Dare I say the word Mortgage and a far worst word Pension.

Posted by Dwain at 2007/08/01 12:10:03.

I don't think I actually speak the same language as most of the rest of the people in this country!

Posted by John at 2007/08/01 12:21:24.

Yes you are right, but the risk linked to that kind of investment is virtually zero. So no risk no gain, this is the rule of the investment world. Now, what I must stress is the fact that inflation of course have got prices to rise, and that investments that beat REAL inflation (not the officila one) are quite hard to come by without taking real risks...

Posted by Lox at 2007/08/01 12:34:09.

Which set of great-grand-parents? And wasn't that savings account heavily depleted to buy you a new computer which led to your wonderful and distinguished career?

Posted by Mum at 2007/08/01 15:46:44.

That's Vera's parents (Edith and William).

...as for the saving account, this was my National Savings one, which never really had anything significant in it. I'm not sure I would directly attribute my "wonderful and distinguished career" to any of the computers I had as a teenager as I mostly only ever played games with them!

However, if this early exposure to technology has had a benefit then it's a good example of a situation where spending is a better long term strategy than saving - so it rather proves my original point!

Posted by John at 2007/08/01 22:00:57.

That said, today I have actually finally started a pension. I'm still not convinced this is the best way to save money for your retirement, but given that everyone else does it I suppose I might as well.

Posted by John at 2007/08/01 22:05:53.

Infact it is not... But I won't start the rant about pension funds...

Posted by Lox at 2007/08/02 01:48:46.

Pension if done properly are brilliant, if done badly they're rubbish.

Just like any investment.

My biggest concern would be all the rent that your paying with no chance of a return on your money.

Posted by Dwain at 2007/08/02 17:06:40.

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