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Inflation noms savings and returns
Jun. 4th, 2010 07:52 pmLast week in the Herald Bernard Hickey pointed out that the ones hit by the budget are going to be savers, as the one-off 5% inflation knocks that amount off the real value of their savings.
(Savings? What are these savings? Who here has -savings-?
If it makes anyone feel better, it does the same to the real value of your debt :D )
Inflation is something I've always forgotten to take into account when looking at what investments return. From a 5% p.a. return (for example on a term deposit) 1% is gone to tax (@20%) and then another 2-4% is eaten up just compensating for the reduction in value of the capital. Leaving very little to show for it. Those interest-bearing on-call or checking accounts at ~3% are letting the money hold it's value, on a good (low inflation) day.
Basically, inflation makes the raw numbers lie. It's probably a rare case when the effect on savings can be directly felt - the time between saving and spending being either so short that it makes no difference, or so long that there is no visceral realisation of what that money -could have- bought. (But remember how the money never seems to go as far as you thought it would - that might be the closest we can get.)
This is why its inefficient to be a passive saver* - the only way to beat inflation is to keep putting money away. Then a) you reach your goal sooner and b) whatever you are saving to buy (goals are important to effective saving) is still that much cheaper.
*of course some people already have so much money that they can afford to be inefficient savers. But I think you'll find many if not most of those people got there by being active savers or investors first.
(Savings? What are these savings? Who here has -savings-?
If it makes anyone feel better, it does the same to the real value of your debt :D )
Inflation is something I've always forgotten to take into account when looking at what investments return. From a 5% p.a. return (for example on a term deposit) 1% is gone to tax (@20%) and then another 2-4% is eaten up just compensating for the reduction in value of the capital. Leaving very little to show for it. Those interest-bearing on-call or checking accounts at ~3% are letting the money hold it's value, on a good (low inflation) day.
Basically, inflation makes the raw numbers lie. It's probably a rare case when the effect on savings can be directly felt - the time between saving and spending being either so short that it makes no difference, or so long that there is no visceral realisation of what that money -could have- bought. (But remember how the money never seems to go as far as you thought it would - that might be the closest we can get.)
This is why its inefficient to be a passive saver* - the only way to beat inflation is to keep putting money away. Then a) you reach your goal sooner and b) whatever you are saving to buy (goals are important to effective saving) is still that much cheaper.
*of course some people already have so much money that they can afford to be inefficient savers. But I think you'll find many if not most of those people got there by being active savers or investors first.
