In spite of the cost of living, it’s still popular.

Kathleen Norris

Back in the 90s, when I was 8 or 9 years old, I asked my old Nan how much she bought her house for. She answered £400. Buoyed by the optimism of the early years of Tony Blair’s Cool Britannia and what looked like a bargain price, immediately I asked to borrow £400 from her to buy her house.

I had made several negotiating blunders:

  1. I didn’t understand the local market for properties of a similar type.
  2. I had been too keen to offer the asking price.
  3. This wasn’t actually a negotiation.

It turns out that £400 in the 1940s doesn’t equal £400 some 50 years later.

Huh?

Yeah, that’s inflation.

Over time the demand for goods and services increase as the country gets richer, costs may increase, governments may interfere, salary increase demands go up as well. A combination of all these mean that I would need to offer over £20K to match the £400 she paid for her house in the 1940s.

No wonder Nan rejected my bid.

So is her house worth £20K today then? Not quite. While generally speaking £400 in the 40s would equal £20K today, in some areas, such as housing, prices have risen much faster, because of supply, demand, meddling governments and other reasons which we’ll explore in another post.

Why is any of this important?

Because the £10 you have in your pocket is worth more today than it ever will be in the future. If inflation is 2%, then your tenner would effectively only be worth £9.80 next year.

This is a lesson I learned after nearly 10 years of my childhood where I popped every pound coin that I came across into a bottle. I considered myself a savvy saver, but my smugness quickly evaporated when a bigger boy calculated how much I had actually lost out on by not doing anything with it.

Money can’t burn a hole in your pocket, but it literally erodes away over time. Put it to good use.