First Lesson In Finance; Inflation.

November 05, 2020

Money rules everything around us so it really makes sense that we should at least have an understanding of how it is working.
This isn’t taught in schools or colleges unless you enroll in the right classes but this is fundamental financial knowledge and most people are completely unaware of it.

The very first thing you need to learn about your finances is this;
Money in the bank is losing value constantly.
If you leave cash in the bank you are losing money in real terms. If you had £10,000 in 2008 it would be worth £7,629.64 by 2018 thanks to inflation.
Don't believe me? Check this site from the Bank of England (BoE) themselves:
Bank Of England Inflation Calculator
(https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator)
The effect can be seen even in the space of one year.
£10,000 in 2019 - costs £256.57 more only a year later.
£10,000 (2019)
costs
£10,256.57 (2020)
in 2019
Inflation averaged 2.6% a year.

Pushing the years even further shows even more dramatic results, but I’ll leave for you to see.

The Government sets [the Bank of England] a 2% inflation target

To keep inflation low and stable, the Government sets [BoE] inflation target of 2%. This helps everyone plan for the future.
If inflation is too high or it moves around a lot, it’s hard for businesses to set the right prices and for people to plan their spending.

Calculate how much your money saved is worth in 10 years
I find it interesting...convenient even, how the BoE calculator doesn't let you calculate how much less your money could be worth in the future if it is just saved.
I searched online for a calculator to figure out how much money you lose to inflation and found this one from rl360.com
(https://www.rl360.com/row/tools/inflation-calculator.htm)
Using this calculator, and the 2% inflation target I ran some numbers.
Let’s say I have £10,000 saved and will keep hold of that for 10 years.
£10,000 today would be worth an equivalent of £8,203.48 A loss of £1796.52

BUT WAIT, THERE'S MORE...
The target for inflation might be about 2% but it can realistically reach 3%
At 3% inflation, your £10,000 is reduced to £7,440.94 over 10 years.

DON'T JUST SAVE YOUR MONEY.
Even in a standard savings account, the interest rates do not keep up with inflation.
What can I do instead? You might be asking. Simple.

INVEST.

Which leads to on the next lesson I should write, the miracle of compound interest from investing, which has made many people financially independent.
If there isn’t a link here, I haven’t written that one yet, but I recommend you do a search for compound interest.

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