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Sunday, December 23, 2012

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?