The impact of this change in the short term depends on whether you are in net debt. If you have more money in savings than in loans (including your mortgage, student loans, etc.), the interest rate increase may give you the opportunity to meet some of the impact of inflation. However, if the opposite is true, and especially if you are nearing the end of the fixed rate period of a mortgage, then you are likely to be much worse off than you are now.
The easiest way to examine the impact is to look at the interest rates associated with each of your accounts. For a savings account, an interest rate of 2% on a balance of £100 will leave you with £102 at the end of the year. If it is a loan, you will owe an additional £2. If you have both, but the savings account has a lower interest rate, it may be in your best interest to use at least some of those savings to pay off your loan.
However, most loans – including most mortgages – are repayable, which means you borrow a certain amount and then repay it over a pre-agreed period, according to a certain formula. The way these loans are structured means that the first installments will see the majority of your money go to interest, with the overall balance only reduced by a small amount. For a £150,000 loan at 4% interest over 25 years, your monthly payment would be £791.76 – and the first month £500 of that would be interest.
So in many cases, if you’re in the early stages of a mortgage and have the ability to overpay, you can save a lot more money in the long run. You can use mortgage calculators to see how much of your monthly payment is actually going to pay off your debt.
The aisles of large supermarkets can be confusing places, with different versions and sizes of the same product available at a wide range of prices designed to bamboozle you. For example, the soft drink section of my local store often includes 2 litre, 1.5 litre, 1.25 litre, 1 litre, 600ml and 500ml bottles, as well as 330ml and 150ml cans sold individually and in multi-packs.
While it’s generally true that larger sizes offer better value for money (and are better for the environment because they use less packaging), that’s not always the case once you factor in special offers. A simple trick that will work for any non-perishable product is to calculate the unit price so you have a direct comparison.
For example, if a 2 liter (2000ml) bottle of cola costs £1.75, that means the cost for 100ml is 175/20 = 8.75 pence. The equivalent of a 1.25 liter bottle offered at £1 would be 100/12.5 = 8 pence per litre, meaning the smaller bottle would be more beneficial in this case.
In many cases, supermarkets include these costs on the price tag to help you. Even if they don’t, it can be useful to calculate the unit costs of more expensive products to save a few pounds each week.
It can be tempting to think about the potential riches of winning big in the lottery or going to the casino, but these are surefire ways to lose money on average. This is because of the statistical concept of expected value – the average result you would expect if you could theoretically repeat an activity over and over again.
Suppose I come up with a game where we roll a dice, and if it was a number from one to five you were to give me £1, but if it was a six you would get £2. Obviously that wouldn’t seem like a good idea since I would win most of the time, so your ‘price’ for getting lucky isn’t high enough. But how do we know what price would be high enough? This is where our expected value comes in.
Think about the first example. The six results of rolling a dice are equally probable. In one of the six outcomes your profit is £2, but in five of the six outcomes you lose £1 (i.e. you have a profit of -£1). We can use a simple probability to calculate your expected profit from this game:
E(profit) = (-£1 * 5/6) + (£2 * 1/6) = -£1/2 (or -50p).
E(profit) = (-£1 * 5/6) + (£2 * 1/6) = -£1/2 (or -50p).
On average every time we play you will lose 50p. But using the same equation, if the “price” for rolling a 6 is increased to £5, then E (profit) = 0. On average, you will now break even in this game. A prize of £8 gives E(profit) = 50p, which means on average you will earn 50p every time you play.
We can apply a similar concept to the National Lottery, where the odds of matching six numbers can be calculated using slightly more complicated probability. Based on this, the expected value of a £2 lottery ticket on August 27 was 95 pence – if this draw was repeated over and over, you would lose more than £1 each time. Therefore, the lottery should not be seen as anything more than a bit of fun, except perhaps in the rare exceptions where there is a large rolling prize.
Similar concepts apply to a casino, where the house introduces specially designed metrics to weight the odds in its favor. For example, the presence of 0 on a roulette wheel means that the expected value of a £1 bet on a particular number is 97.3 pence – in other words, you lose more than 2 pence per spin in mean.
In the end, it will be a very difficult winter for most of us. The main way for the country to overcome this crisis is through aid on a larger scale. But until we see if that actually happens, all we can really do as individuals is make small changes and, of course, help those less fortunate than ourselves.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Craig Anderson does not work for, consult, own stock or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond his academic appointment.