Why inflation means you need to revisit your finances

We’re facing the worst cost of living crisis in a generation.  

The prices for everyday items and services are rising at their fastest rate for over 30 years. And the rate of inflation is expected to climb even further.

Bills could climb by hundreds of pounds. So even if you've got relatively robust finances, you might still face a challenge.

This spike in prices could affect far more than your spending. They could have knock-on consequences for your savings, investments, and wider financial planning too.

We’ve created a checklist for the areas of your finances you could revisit.

In this article, you’ll get practical tips on financial planning and making the most of your money, but it’s not personal advice. If after reading, you’re still unsure what’s right for you, you should ask for financial advice.

Check in with your spending

Now that essential costs like fuel, food and energy have risen, and could rise even further, it’s important to check that you’re not living beyond your means.

Even some higher earners might have to cut spending this year. Our Savings and Resilience Barometer, built in partnership with Oxford Economics, forecasts a third of those in the highest income decile won’t have enough surplus income to deal with price rises.

Start by making a list of all the money you have coming in and everything you spend. This is much more straightforward if your bank offers an app which breaks down your spending for you. Then you could use our online budget calculator to compare your income and spending.

USE THE BUDGET CALCULATOR

It’s worth shopping around on price comparison websites for cheaper bills. You could also look at your non-essential spending to see if there are areas you could cut back on. Any money left over could go into savings which we cover in the next section.

Re-calculate your emergency cash pot

Your emergency pot is a cash buffer for any unexpected surprises or income shocks. So, as the costs of your essentials and monthly spending rises, the size of your emergency pot will need to be bigger too.

Once you’ve calculated your outgoings, you should check whether you’ve still got enough cash set aside for emergencies.

We think you need around three to six months’ worth of expenditure set aside as cash. If you’re retired, it should be closer to one to three years’ worth as cash.

Your emergency cash must be quickly and easily accessible. Easy-access savings accounts don’t earn a great deal of interest, but that doesn’t mean settling for painfully low rates. It’s well worth shopping around for a competitive easy access account to ensure your safety net is working as hard as possible for you.

MORE ON CASH SAVINGS

Check you’re making the most of your savings

The value of cash savings often struggles to keep up with rising prices. If your interest rate is lower than the rate of inflation (which it will be at the moment), you will lose money in real terms. Especially over long periods of time.

Try the inflation calculator to see how much your savings would have needed to grow to keep up with rising prices.

INFLATION CALCULATOR

For money you don’t need right away, you could make it work harder with fixed-rate savings.

This is where you tie your money up for a set period in exchange for a higher rate of interest. You won’t normally be able to withdraw the money until the term is up. You might decide to set up a number of fixed-rate savings products so they mature at different times.

HOW TO BUILD A SAVINGS PORTFOLIO

Listen to our podcast on Bills, Bills, Bills

Switch your money on

Active Savings lets you pick and mix from a range of UK banks and building societies’ savings products through one simple-to-use online account. You can choose from a range of easy access and fixed-rate savings products offering competitive rates.

When your money is in a savings product through Active Savings, it’s held by that bank or building society. If they were to fail, the FSCS will protect eligible deposits up to £85,000 per banking licence. Find out more about FSCS protection.

DISCOVER ACTIVE SAVINGS

Review how much you’re taking from your pension

The amount flexibly withdrawn from pensions between April and December 2021 was 19% higher than the same period in 2020.

If you’re flexibly taking money from a pension to cover your living costs, you need to think carefully about how much you can afford to withdraw. It might be tempting to increase your withdrawals to cover a spike in spending, but this could reduce how long your pension will last and the income you could take in the future.

Try our drawdown calculator to see how long your pension pot could last based on your withdrawals.

DRAWDOWN CALCULATOR

One option is to supplement your income from any savings you have. But for difficult decisions like this, it might be worth turning to an expert for help.

A financial adviser could help you work out a sustainable strategy for using your pension, as well as any other investments and cash, to provide you with the income you need.

If you’re over 50, it’s also worth using the government’s free and impartial Pension Wise service to learn more about your retirement options.

LEARN ABOUT RETIREMENT ADVICE

Concerned about your financial future? Get an expert to help you

At crucial junctures like this, it’s worth considering getting an expert to help you with financial planning.

A financial adviser can give you a clear view of how your finances look now, and help build a robust plan for the future. They’ll be able to delve into the detail and tie the various aspects of your finances together, looking at areas where you could save money to help make your money go further.

To find out how advice works, and the charges involved, book a call back from our advisory helpdesk. They won’t give advice on the call, but they’ll help you get a better idea of whether it’s right for you. Then if you want to take advice, they can put you in touch with an adviser.

BOOK A CALLBACK

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