The saver’s greatest enemy
April 28, 2007
I couldn’t have said it better. Except for, maybe, bourgeoisie… that’s a word not as commonly used anymore as it was back when Lenin was busy planning a revolution. But the same principles still apply - even if you manage to stash some money away and not spend it all in one go, you will have to beat tax and inflation for your money to actually increase in value over time.
Cliff @ Fool.co.uk has written an elaborate article with lots of examples on how taxes and inflation will affect your money. His conclusions: take advantage of tax-free returns by making full use of your ISA allowance or buying Index-linked Savings Certificates, which are guaranteed to beat the RPI-rate of inflation (currently 4.8%) over three to five years.
The RPI index is currently at its highest since 1991 and even though this might give some people mighty grief, other dramatic examples prove that we should be thankful to live in a stable and secure economy like the UK. Zimbabwe is currently suffering from the world’s highest inflation rate of 2,200%. Compare this to what we call a “scandalous” 3%… If you had put £10 under your mattress last year its buying power would be reduced to £9.71 now (assuming 3% inflation). If a farmer in Zimbabwe would ever be lucky enough to own the equivalent of £10 and he would have buried it in his backyard a year ago, the same money would now only be worth £0.43.
If you’re still worried about inflation in the UK, here is a calculator that let’s you determine exactly how much value your money’s lost over the years. Just promise you won’t be upset… 
