The cost of living crisis has likely presented you with more than your fair share of challenges to overcome. It may have increased the financial pressure on your outgoings as inflation has remained high over the past two years and interest rates have surged upwards over recent months.
You might have found yourself forced to tighten your proverbial belt as even the cost of basics, such as your weekly shop, has skyrocketed.
Some of the issues you might have faced over the past year might include:
- Dealing with an increase in your mortgage costs if your deal has matured and you’ve been exposed to higher rates
- Navigating significantly higher energy bills
- Trying to protect your savings from the eroding effect of long-term inflation on their “real” value
- Worrying about your ongoing investments in light of a difficult 2022 for global stock markets.
It is natural to have concerns about your financial situation, especially during turbulent periods. But it’s important to remember to stay calm.
Here are three useful ways to shore up your finances during the ongoing cost of living crisis.
1. Review your budget, savings, and existing debts
One of the simplest ways you could help shore up your finances is by reviewing your budget and streamlining your outgoings.
This may involve:
- Reviewing any existing debts, such as your mortgage agreement, credit cards, or loans and taking steps to try and reduce your repayments
- Cutting out any non-essentials from your monthly bills
- Ensuring you have the best rates available to you on your savings accounts and with any regular bills, such as insurance.
Your savings can be especially vulnerable to the long-term effects of inflation. Standard Life recently conducted a study into the relationship between long-term periods of high inflation and personal savings.
They found that your purchasing power could be considerably diminished if your savings are exposed to high levels of inflation for a sustained period of time.
After two years of inflation, £10,000 sat in cash savings (earning 3% interest) could see the following effects on its “real” value based on different levels of inflation.
The right-hand column in the table below shows how the effective buying power of your savings is affected by different rates of inflation:
Source: Standard Life
It is clear that long-term exposure to inflation of 8% or higher might lead to the real value of your savings shrinking by thousands of pounds.
After seeing double-digit inflation figures for much of the last year, figures are finally starting to slowly come down.
The Office for National Statistics (ONS) reports that UK inflation is at 6.8% in the year to July 2023.
While it is a positive step in the right direction, the effects of inflation on your savings are still a pressing issue. So, it’s not surprising that Canada Life reports that 83% of advisers in the UK report inflation as the number one worry for their clients.
Taking the time to sit down with your financial adviser and review your situation across your ongoing debts and savings might help you navigate the challenges presented by high inflation and rising interest rates.
2. Consider putting safety nets in place, such as an emergency fund or protection
According to This is Money, more than 25% of UK households would struggle to cover their outgoings within just one month of losing their primary source of income.
Protection could offer you a way of providing yourself and your loved ones with valuable emotional and financial relief in the face of possible redundancies and unemployment.
Income protection could help you cover your loss of earnings. This could replace a percentage of your income if you were unable to work for an extended period due to an accident or illness.
The cost of protection is likely to be dependent on your current health and lifestyle, as well as the desired length of coverage.
While adding protection costs to your monthly outgoings is an additional expense, you shouldn’t underestimate the benefits of the added peace of mind and financial protection.
Aside from insurance, it is important that you consider setting aside an emergency fund to provide for a sudden loss of income, or for unexpected bills.
You might want to consider saving ideally three to six months’ worth of essential bills, such as:
- Rent or mortgage payments
- Utilities
- Regular commitments.
This could help you navigate any short-term issues arising from a loss of work, illness or an accident and tide you over until you’re able to resume work or, if you’ve taken out protection, your claim comes through.
Once you’ve set aside the necessary funds, it might be worth considering investing the surplus to generate growth to better secure your financial future and protect your money from inflation.
3. Avoid any knee-jerk investing decisions and look at ways to further diversify your funds
Investing can be stressful at the best of times, perhaps even more so during periods of instability or market downturns.
But it is important to remember that investments could offer you the kind of returns needed to potentially leave your finances better equipped to navigate periods of high inflation.
The fear of potential losses could elicit emotional, knee-jerk reactions and prompt you to make investing decisions that aren’t in your best interest.
It is a psychological bias known as “loss aversion”, which states that the pains of losses are felt by people twice as hard as the joys of gains.
The words “sell, sell, sell” might reverberate around your mind if you see markets dip. You might want to take steps to ignore these thoughts, as while markets can go down in the short term, over the long term they typically bounce back.
If you opt to sell, you’ll likely miss out on the potential gains made when your investments recover and continue to grow.
One way to mitigate against potential losses is to ensure you have a well-diversified portfolio. This could help you offset losses with gains elsewhere.
Read more: How our innovative approach to investing can help you get more from your wealth
Get in touch
If you have any ongoing concerns about your finances, it is important that you seek out professional advice to help you alleviate any worries.
Read more: How to manage the harmful effects of inflation on your wealth
Please reach out to us by email at info@grey-parrot.co.uk or by calling 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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.
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