Beating Inflation in 2013

With a Retail Price Index of 3.0% in November 2012, your £100 from last year are worth only £97 this year. In other words, the money that you might have in your savings account is decreasing at the rate of 3% every year. If your bank account doesn't give you an interest of 3% or greater, you are actually getting poorer with the passage of time.

Let's look at some strategies to make your money work harder so that inflation can't eat it all up. Please note that all discussion is with reference to the options available in the retail market in the UK.

Earn £5 Extra Every Month

If you earn at least £1000 a month, your best first move is to open up a Halifax Reward Current Account. You just need to deposit £1000 a month---this could be your salary or an internet transfer from another account. You don't need to "hold" this money; spend it as you like. In fact, it makes sense to pay your bills from this account. The best part is that if you don't deposit £1000 in some particular month, you won't be penalized in any way---it's just that your account will not get the promised £5 for that month.

Best Regular Saver Account

If you can put aside some money every month, you must consider regular saver accounts. One of the best such account with an upper cap of £250 per month is the Regular Saver account offered by HSBC. This account requires you to have an HSBC current account first. The interest rate is either 4% or 6% depending on the type of current account you have with HSBC. Even if you don't get the preferential rate of 6%, you shouldn't worry as 4% is higher than the expected inflation rate of 3%.

Cash ISA Account

The cash ISA limit is £5,640 for the current tax year. If you can save more than £250 per month (i.e., you have filled your Regular Saver account to max capacity), you should consider putting the remaining savings in  a Cash ISA account. There are various options available depending on what you are looking for. Some of these do provide an interest rate greater than 3%.

Buying Gold

Finally, buying gold is an option which shouldn't be ignored. With reliable internet sellers such as Bullion by Post, you can easily buy a gold bar in a secure and convenient manner; most authentic sellers will ship next day via Special Delivery.

A tip here is to buy a gold (or even a silver) bar with the maximum weight that you can afford. A 20 gram gold bar, for example, is always cheaper than buying two 10 gram gold bars.

You should, however, consider the downsides such as keeping the bar in a secure place and the money you lose in buying and selling gold (i.e., the overhead associated with converting it into cash). Gold should be an option only if you are interested in an investment of a longer duration (more than 5 years).

Summary

If you earn more than £1000, your first step should be to open up a Halifax Reward Current Account. If you can spare some money, you can invest up till £250 per month to get an interest rate of 4%. If you have any more money, consider filling up your Cash ISA limit. And finally, if you are still left with some cash, do consider buying gold.

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This blog post uses images from Images of Money and Digital Money World.

The Myth of Savings Account - UK Version

Now that we know Savings Accounts are a myth, at least for a weak currency like Pakistani Rupee, let's see if Pounds Sterling fare any better.

We'll compare the inflation rate in the UK with some of the most promising savings account types in the UK (taking 1 year interest into consideration). According to Money Supermarket, the market leader is Baroda MAX, which is currently giving a return of 2.5%. Compare this to 3% inflation based on RPI calculated for November 2012 by ONS, and you'll know that no savings account currently covers the rising cost of living for you.

But everyone buys different things. My shopping list, for example, doesn't include tobacco, and if the price of tobacco increases, it doesn't affect me. Thins brings me to an important question: What is your personal rate of inflation?

What is your personal rate of inflation, really?

This is a question everyone should ask himself. Fortunately for us, BBC has developed a personal inflation calculator, based on Retail Price Index (RPI), which you can use to track your own inflation. Mine is 4.7%, terrible for any money saved which is losing its power to purchase every year!

So, what really should you do with savings? As someone else suggested in the comments, perhaps, we should all buy gold?

Gold Prices in the UK

Below, there is a price chart of 1 oz of Gold in British Pound Sterling over a period of one year. As you can see the price has been fluctuating but it's not clearly gone up or down. In fact, if you just compare 20-Dec-2011 with 20-Dec-2012, the gold price of 1 oz has been £1029 and £1019, respectively. We cannot consider that a rise!




Gold, however, has its attraction. Below is a similar chart, which spans over a period of 5 years.

Gold Price Over Last 5 Years (from Bullion by Post)

hm...What's so nice about gold? Why does everyone talk about gold reserves? It certainly has no wide-spread practical use except being worn as jewellery.

So, should we put all our savings in buying gold?

The Myth of Saving Accounts

This should be an easy one. Which one is better: Rs. 100,000/- invested in a savings account in Pakistan or an equal worth of Pound Sterling lying in your drawer?

Well, the first thought that comes to one's mind is that money put in a savings account is better than the same lying in the drawer. After all, the savings account is supposed to give your some profit/ interest; isn't it?

Let's do some calculations.

Usually, the longer the term of investment, the better is the return given by the bank. Let's take the example of Bank Al Habib's Special Saver Certificate, which as of today is giving 8.75% profit for a 1 year certificate. I believe this is a pretty good rate of return.

With an investment of Rs. 100,000/-, after a year, you will have Rs. 108,750/- in your account. Let's say that you invested this money on 1st Jan 2012 and obtained the profit on 31st Dec 2012. Now, let's compare this with buying and selling British Pounds on the same dates.

On 1st Jan 2012, Rs. 100,000/- would have given you something around £712 (using Oanda.com's historical converter). Selling these 712 pounds now (as on 18-Dec) should get you Rs. 113,568/-!!

Amazing are the ways of inflation!