Archives for the month of: February, 2013

Those of us with a bit of a clue would normally by now start to consider where next years ISA savings are going to live. Chances are the current interest rate you are receiving is about to drop drastically, as it was probably only a bonus anyway. Of course the ISA provider half hopes you’ll not bother and continue loading up the same one in the new tax year, whilst it offers a paltry 0.1% or so…

At around this time of year, too, the financial pages carry a range of adverts from providers detailing their new rates, and some papers and websites have handy comparison tables to make this a bit easier. 

Well this year is no different – except for one tiny little detail. Thanks to a combination of factors the average interest rate being offered by providers is, well frankly, pathetic. Top rates of 2.0, or 2.5 might look attractive – especially if printed in a big enough typeface – but if you take inflation into account then they are in affect daylight robbery.

Inflation? What’s that? Let’s explain:-

Inflation* is a measure of how much prices rise – in affect a measure of the ‘cost of living’. A ‘basket’ of goods is used as an index, and the monthly average price is calculated**. The difference month on month is calculated as a percentage rate and reported as ‘the rate of inflation’. For simplicity’s sake this rate is actually assumed to apply to all goods and services, not just those featuring in the ‘basket’ and is taken as a measure of the cost of living***. The causes of inflation are many and complex, and beyond the remit of this post, suffice to say it happens and we have to deal with it.

How is this linked to savings? Well consider this heavily engineered and mildly preposterous example. Imagine a loaf of bread costs £1. You don’t need a loaf of bread this month, but you know you will next month. You also happen to have a pound in your pocket which you decide to put aside to buy a loaf next month. You put it in your piggy bank and forget about it. (Did I say this example was preposterous?)

Four weeks pass and you fancy some toast. You raid your piggy bank for that shiny £1 coin, go down to the shop, grab a loaf and go to the counter. ‘Just the loaf please’ you say. ‘That’ll be £1.03, please’ sayeth the shopkeeper. ‘Wha??’ you cry. It was a pound last month, you’re thruppence short. But in the intervening month inflation, conveniently set at 3% (maths is not my strong point), has pushed the price of loaves up.

Another way of looking at it is that your £1 no longer buys a £1’s worth of goods (in this case – again conveniently – only 97 pence worth of goods). Inflation has effectively devalued it, taken a chunk out of it’s value.

This is the major problem of holding cash as form of wealth. If it is taken out of circulation and just stuck somewhere, it withers and dies. Its important to realise that cash is just a medium of exchange, not really a measure or store of wealth in itself.

So how do you preserve the spending power of your cash. Well when you save it you ordinarily demand that it earns a rate of interest to compensate you for not spending it on something straight away. Knowing what you now know about inflation when you do come to spend it you want it to at least be worth the same as when you first stuffed it away. So you must also demand that that interest rate is at least equivalent to the rate of inflation to preserve the value of your savings for when you do want to spend it.

 Er, where was I…?

Oh, yeah, ISA accounts, or at least Cash ISAs. We’ll assume you want to put your money away for the whole tax year and not withdraw it – you might even want to addnto it. When it comes to choosing next years provider you’ll want to prevent yournmoney dying as laboured above, so of course you need a rate that keeps up with inflation. Sources (as they are called) forecast inflation to remain somewhere around 2.7% for at least the next 12 months, so you need an ISA interest rate of at least that.

Guess what. No-one appears to be offering that at the moment. The closest for an ISA you can transfer previous years accumulated ISA savings into is 2.5%, so you’re still short. Many others offer no where near that rate.

One of the reasons mooted for the lack of offerings this year is that Bank andBuilding Societies have taken advantage of the Goverment’s money to lend scheme, which has provided vast amounts of cheap credit for the banks to lend to businesses and individuals. Because of that, they don’t need our money, which is why they offer savings schemes in the first place. In effect they borrow money from savers to loan to borrowers, and make a profit on the difference in interest they set for either side of the equation. In effect then the value of saver’s money has fallen – no one wants it – and so the savings rates offered are lower.

So where now?

It doesn’t look as if anyone is going to offer an inflation-proof savings scheme between now and the 6th April. In our household we have traditionally (well the last 4 years anyway – we’ve only just woken up to the Middle Class Con) used cash ISAs to shelter savings – specifically the interest earned on them – from tax. We have transferred accounts from one provider to another to get the best rate available (rate tarts they used to call people like that). The rates offered were sufficient to at least keep our cash ahead of inflation.

This year however we are given pause for thought. Leaving it in the cash ISA system at the moment will likely erode its value to us in the future. (We are using MarkyMark’s definition of savings as ‘deferred spending’ – more on this another time). But on the other hand once it leaves the cash ISA system it cannot be returned (above the annual deposit limit anyway) should interest rates become more attractive.

I guess the answer to the problem is what do we wnat the money for anyway. If it’s for a specific event in the not too distant future it would probably best leaving it a fairly liquid form, and therefore taking the hit on interest rates v. inflation.

The alternative is, if this money is just for some unspecified ‘rainy-day’ moment it might be better to put it into something more ‘investment-y’ to realise better potential returns. But that inevitably exposes us to ‘risk’, not a concept we have so far contemplated, at least not outside Barmouth amusement arcades! It also brings in the concept of management costs and fees which need to be factored in and their affect on returns and accessibility.

I’m gonna have to man up and do some homework here. I’ll keep you posted.

 

 

* originally economists defined ‘inflation’ as an increase in the (physical) money supply of an economy. It comes from when coinage – originally minted from a finite supply of precious metals, usually gold – was melted down and re-issued at the same face value but mixed with baser metals, in order to make the original gold supply go further. The physical value of the coin became debased and so merchants demanded more coins in exchange for the same goods and services.

** its actually far more complicated than that. Effectively an index value is calculated using a series of formulae based on the prices of that basket. The value on its own is of little value – at least to laymen like me. It’s the difference between indices across a period of time which is the crucial number.

*** there are actually several different indices or ‘baskets’ in use in modern economics, and at least 2 are used in UK politico-economics, depending on which one best serves the protagonist’s argument!!!

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I have somehow picked up some non-serious but weird medical condition that is beyond the expertise of my local or even regional health authority, and I have been referred up the food chain. Out of the blue a letter arrived in the post for an appointment at a hospital in London. Yes; London. Not scary for some people I know but for a country mouse like me living in the fields of North Shropshire, it might as well have been Sydney or New York. It was also for 9:30 in the morning…

There was talk of going down the night before and putting up in a hotel, but Marky is nothing if not a tight-wad, so Wednesday morning (5:45) saw me standing wide-eyed and fidgetty on Stafford station platform ready to catch the Red-eye to London Euston, weighed down with a knap-sac full of breakfast goodies, a lunch box, a flask of coffee and a good book.

I had a plan to make my way to the hospital, factoring in plenty of contingency time (I hate being late for anything, I find it the height of bad manners), and having pored over maps and timetables, deliberately chose the cheaper but earlier train – hence the owl-spooking 5am drive across the Shropshire-Staffordshire border.

Once off at Euston – man! that’s a huge station, it’s like an airport – I stood a bit desolate and lonely wondering what to do next – I still had 2 hours before the appointment. Being unfamilir with London’s rush hour I decided the best option was to get to the vicinity of the hospital first then see how I was doing for time. I went to the loo – uh oh, first mistake, that’ll be 30 pence please, that was why the lady sitting across the aisle from me on the train visited the loo on the carriage a couple of times before she got off – then got sucked into the heaving mass of people joinimng the underground.

Now despite knowing where I was going and walking in what I thought was a purposeful manner (I’m a tall bloke so even my leisurely pacing is fairly brisk) practically everybody else overtook me, all scurrying somewhere like busy worker ants. I had read that city living makes everyone move faster but it was eye-opening actually witnessing it. It was also a pleasure knowing I didn’t have to move at that speed everyday.

Any ways without further incident I was seen at the hospital fairly efficiently and with the delightful prospects of further appointments in the Metroplois in the next few weeks found myself back out on the pavement by 10 am. My return train wasn’t due to leave for another five hours so the whole city was mine for the taking.

I droped into a Costa coffee shop (I find the monotonous familiarity of chain coffee shops somehow reassuring, especially whenever I’m in a foreign city) to review my options and phone home, then decided to re-enter the underground and head up to Trafalgar Square and take a wander round the National Gallery – as it was free, and I didn’t have an eight-year-old in tow for once.

What it says on the sign – no idea who the girl is though..

I’d already scoped out its prospects on line before leaving for London, so knew it was a good place to while away somw free hours. It was a fantatsic couple of hours to be honest – I didn’t rush round and try and do all of it – it’s too big, but I could linger over those paintings that caught my eye, regardless of how famous (or not) they were. There were a surprising number of nudes and topless ladies on display in many of those paintings as well which is always a bonus.

Lunch was taken alfresco from Markys butty Box situated immediately outside the Gallery, in the weak February sunshine watching the street performers in the Square (I sat behind them; I could see them but they couldn’t really see me), while just down the road the Union Flag fluttered briskly above the mother of all Parliaments. It was all there – black cabs, red buses, Japanese tourists and pigeons; the lions, the fountains and above it all Lord Nelson standing defiantly in the wind.

It wasn’t that gloomy – I was shooting into the sun!!

I’d got myself to the centre of the craziest, liveliest city on the planet with absolutely no problem, and more importantly little expense (I figured that after transport costs I’d contributed less than a fiver to London’s coffers – sorry Boris!) and was actually enjoying being there. OK it had cost me a day’s annual leave, but I can always make that back thorugh working flexi.

All in all I felt pretty chuffed with myself and my self-reliancy.

I must do this again soon. Oh, wait a minute – the post has come and look! yes there it is. Another appointment – no two appointments. Looks like I’ll be back in a month’s time. I wonder how I can exploit my new-found skill in enjoying cheap day trips to London. Maybe I should start a website…

January is over now – the time for hibernation is past. The days are getting imperceptivity lighter. The sun is rising fractionally a little more to the east every morning now. Its time to shake off the winter covers and get moving again.

Its a little early for New Year it not falling on the 21st March of course (Bloody Pagans – Ed) but I’ve formed a few resolutions that I intend to keep this and every year from now on.

1. ‘Spend less than you earn’ – So obvious it’s almost painful, yet it’s taken me till recently to realise this is an effective way to some sort of freedom. I’ve put it in quote marks to show these are not my words. They appear all over the Financial Blogoshpere so any one could lay claim to them. It doesn’t matter anyway as they are simply a distillation of the Micawber Principle, viz:-

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

2. Invest the Rest – notice I say ‘invest’ not ‘save’. Saving is merely deferred spending in that you have a bit more control over when the money leaves your hands. Its better to have some savings rather than none of course, as a bit of unallocated cash in reserve gives you some power and control when faced with life’s little quirks. But savings on their own aren’t going to free you from the yoke. I’ll explore this area in detail another day. Investing on the other hand may bring freedom closer, as investing is intended to achieve greater returns on your money, albeit at great risk of losing every penny so allocated.

3. Reduce the amount of Stuff in your life. A personal bugbear of mine. Not only is the unconscious consumption of tat draining your wallet and the planet’s limited resources, but so much of it comes either with built in obsolescence, or requires constant feeding in the form of subscriptions, updates or maintenance. Better to reduce the amount of stuff in the first place. All this drains your energy. You can extend this to relationships as well if you like – better to have a few deep meaningful real relationships than constantly reacting to the trolls that follow your internet profiles.

4. Look after what you have. Having reduced your Stuff to a few well-loved well used things, look after them. Something I have not been a shining practitioner of in the past. Find out how they work and how to keep them working.

5. Don’t rely on someone else to fix it for you. Get stuff sorted sooner rather than later. There’s an axiom in the business world about doing small jobs straight away, then getting them out of the way so they don’t clog up your brain. That goes for all aspects of life as well. Anticipate problems. Plan ahead and always, always have a Plan B.

6. Look after yourself. I realised I haven’t taken a single pill this year. Not even an aspirin. I appreciate I’m lucky enough not to have something serious wrong with me, of course, and I hope to continue that as long as I can help it. I think looking after your body is better than any medicine. Keep positive and a sense of humour. Keep active, everyday. Get some fresh air, even this time of year (clue – wear extra clothes), look after your teeth, your back, your insides. Don’t eat processed food – you never know what’s in it. Cut down on the booze and caffeine or at least switch to fewer servings of the decent stuff. Above all take time out for yourself.

That’s probably enough to be getting on with! Now, must go and lie down – they’re threatening snow again…

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