In October 2021, with the Consumer Price Index (CPI) at 4.2%, Barclaycard found that 88% of consumers were worried about rising inflation.
Five months later, the Office for National Statistics (ONS) confirmed that inflation stood at 6.2% for February 2022, with a peak of 7.4% in spring.
Global supply chain delays, battered economies reeling from the pandemic, and the war in Ukraine have combined to force a sharp rise in the cost of living.
With household bills increasing rapidly, the hike to the energy cap in force from 1 April has exacerbated an already difficult situation and will, according to the Guardian, push 1.3 million Brits into poverty.
But there are things you can do to keep yourself financially stable, even during difficult times.
Keep reading for five simple tips that will help you to ride out the cost of living crisis.
Revisit your household budget
1. Income versus outgoings
Begin with some simple cashflow modelling. Make a list of your income and outgoings to see how much disposable cash you have and to identify areas where savings could be made.
Even a quick check through your household finances could uncover unused gym memberships or forgotten subscriptions to cancel. Seeing direct debits in black and white might be the push you need to shop around for a new deal on your car insurance or to switch banks to one offering a better rate.
While your income might be regular, your outgoings are likely to fluctuate so keep a close eye on your expenditure.
2. The “50/30/20” rule
To budget successfully, you’ll need to split your outgoings into three categories:
- Needs
- Wants
- Savings
Your “needs” are rent or mortgage payments and household bills for shopping and fuel. “Wants” are your occasional luxuries like trips to the cinema or a meal at a restaurant. “Savings” is the money you put aside for your future, in the form of savings and investments, such as an ISA or your pension.
Now make use of the “50/30/20” budgeting rule to allocate proportions of your monthly income so that:
- 50% goes towards your needs
- 30% should be spent on your wants
- 20% should be put away in your savings.
This simple sum should help you to spread your expenditure effectively, as well as highlight issues that need addressing, possibly by cutting back in some areas.
Consider the impact of the chancellor’s National Insurance changes
3. Salary sacrifice
Rishi Sunak’s unpopular rise in National Insurance contributions (NICs) came into force in April 2022. It affects employers, and employees, and sees working pensioners above the State Pension Age making NICs for the first time.
Rather than scrap the 1.25 percentage point rise – due to become the Health and Social Care Levy in 2023 – the chancellor made a fresh announcement. Sunak used his spring statement to confirm an increase in the National Insurance Primary Threshold and Lower Profits Limit, for employees and the self-employed, respectively.
The increase will benefit almost 30 million people, with around 70% of NICs payers contributing less.
You might consider salary sacrifice as a way to reduce your NICs further. By reducing your salary, and paying the reduction straight into your pension, you lower your pre-tax salary and decrease the Income Tax and National Insurance payable.
You’ll need to remember that reducing your salary could lower your borrowing potential when you come to take out a mortgage. It may also affect other benefits, such as any “death in service” payment, so speak to us if you are unsure.
Think carefully about your pension choices
4. Approaching retirement
In your approach to retirement, you’ll already have some important decisions to make. The current economic climate could make those choices harder.
You might consider an annuity that increases each year in line with inflation, helping to maintain your income’s buying power. The defined benefit (DB) pensions you hold might have this escalation already built-in and your State Pension, too, will rise each year, thanks to the triple lock.
5. In retirement
If you are already retired, the cost of living crisis will be affecting the buying power of your invested pot, as well as the pension withdrawals you make.
Be sure you only withdraw what you need. This will keep the maximum amount invested with the chance for investment growth – with the risk that your fund could fall as well as rise. It also means you won’t be left with excess funds.
Unused withdrawals are likely to sit in cash, and with savings rates low, your money will be effectively losing value in real terms.
Get in touch
If you’d like help managing your money through this period of low rates and high inflation, contact us now. Get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
