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Some say inflation is good. The capital of your mortgage is eroded, for example the value of your home goes up! This is an argument for an interest-only mortgage, which advisors do not recommend. If no capital is paid then the repayment is very low. Take an extreme example – 35 years ago I arranged a mortgage for a lady to buy an End Terrace house, she paid £8,995 for it and wanted a £8,545 95% mortgage with a £450 deposit. Today the house is worth £160,000 and he would still have a £8,545 mortgage if it was interest only. People today shell out more than that for car finance!
100 years of inflation means that a teacher’s annual salary has increased from £176 per year to an average of £30,889 per year. Gold was at £18.93 an ounce, now over £600 an ounce and rising.
The UK went decimal in 1971 – it was a good excuse to raise prices, which many people fear would be the case if we joined the Euro. Inflation can be gauged by Mars Bars, which are often referenced in price comparison tables. A Mars bar cost 0.16p in 1982, more than 0.45p now. Allowing for this price increase, let’s use the amount of Mars Bars to compare to inflation: –
Belongings , Mars Bars 1982 , Mars Bar 2007
House – 147,775 – 474,053
Porsche 911 – 104,500 – 170,000
AGA Gas Double Oven – 6,218 – 15,121
Washing machines – 1,875 – 560
Gallon Petrol – 10 – 11
pints of beer – 4 – 7
Frozen Chicken – 4-10
Now let’s look at pension. If you took a personal pension, as I did, and paid £100 a month from age 30, you could expect to receive a pension of around £12,000 a year or 6,250 Mars Bars a month at age 65 was imposed. In fact now with diminishing returns at age 55 and after paying for 25 years, the projection has dropped to £3,000 per year or 555 Mars Bars per month!
So it can be said that ‘One Mangal a day – helps you work, rest and get paid’!
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