We often remark on the miserly low interest rates. Simple cash deposits make nothing at all, if you’re lucky you might find 0.5% on the High Street. So what should we make of this, how do we manage it and how long will it go on for?
I remember the time when the growth of financial investments were illustrated as either 5 or 10% a year. That now seems a distant memory of an almost unbelievable world. These days the meagre interests rates are below the rate of inflation and therefore the value of the money is being eroded before our very eyes. Even bonds, gilts and stuff like that, will probably lose money once inflation is taken into account, although they are pretty secure.
Our interest rates in the UK have been extremely low for over 10 years – initially lowered in response to the financial crash in 2008/9 in order to stimulate the economy. Dis anyone imagine those low rates would last so long, or even that they would become even lower?
So what are the consequences of low interest rates?
Low interest rates affects us as savers. We get a pitifully low return on cash deposits, hardly better than stuffing bank notes into a mattress.
Borrowing is relatively cheap and the low rates were designed to encourage people to borrow money to buy houses, flats and fancy cars. People have certainly done that and happily inflation has always been at a manageable level in recent years; after all a good economy needs some inflation.
However, the supply of cheap loans and mortgages has led to one type of inflation – house prices. The cost of housing must be frightening to many young people, who may not stand much chance of ever getting on the housing ladder. Us older folk, we are often sitting in our houses (and paid for) without money worries. We are not unusual.
The effect of this supply of cheap money has been to drive up house prices, therefore widening the gap between young people at the start of their careers and those of us at the other end.
So to beat these low interest rates, it is understandable when people to look for other places to stash their cash for a better return. Some will go down the buy-for-let road because property is always a fairly safe bet. And yet, arguably this fuels the housing problem in society even more.
Apart from property investments, where do people go with their spare money? Well you can always find investments offering a high return, in exchange for a higher level of risk. You could buy things that might go up in value – home improvements, classic cars, high-end analogue watches, boats, art and the list goes on. These toys could well be attractive: imagine having some fun with the car of your dreams for a few years, then selling it for a tidy profit. Tempting, for some.
Now we live in extraordinary times. We are all clocking how some folk have suffered economically through COVID. People who have had 2 or 3 jobs just to keep their heads above water, only to be fired or be furloughed. Others might have done quite well – working from home, no expensive season tickets, saving cost of expensive holidays.
Where do we stand in all this?
Somewhere in the middle we find ourselves. We cannot afford to be too risky, I certainly don’t want to be buying a classic vintage car or any other ‘get rich quick’ scheme.
Instead we must try to be wise stewards, grateful for what we have. It is important to strike the right balance between being prudent and riding this out. Perhaps as a society we have had our years of plenty and now we are in a period of modern-day famine?
To make things worse, I think we can be assured of some tax increases in the years ahead. After all the Chancellor will be needing to pay off some of the COVID related debts somehow, unless money just becomes obsolete in the future.
Back to striking the right balance. It doesn’t seem right to hoard money (and remember we are just ordinary people here, so we don’t have much to hoard), nor do we want to be irresponsible. You know the saying “when it’s gone, it’s gone”? This is something we need to keep in mind; we have limited room to recover expenditure.
So for us we need to preserve our modest assets, use what we have wisely and avoid buying expensive toys, especially those that can go wrong and become money pits!
Above all we are thankful for what we have. Although we are having a kind of thrifty, Easyjet budget retirement, I feel like the richest man in the world!
Question
If you’re reading this and have spare money, what do you do with it?