How to Navigate the Cost of Living Crisis

At some point, prices and earnings will stabilise. We have seen high inflation in the past and it cannot be sustained indefinitely. Rather than worrying about the bigger picture, the best thing to do now is manage your own finances effectively.  

Make a Budget
The first step to getting your finances under control is to make a budget. This does not need to be complicated, but it’s a good idea to understand how much money is coming in every month and how much you are spending.

To get started, make a list of:

• All sources of regular income. Remember to account for taxes, particularly if you are self-employed.
• All regular, essential expenditure.
• Any ad hoc expenses such as repairing or replacing large items.
• Discretionary spending.

If you are earning more than you spend, you have a cushion available to deal with rising costs. However, if your budget is already tight, you might need to make some changes.

Cut Costs
While prices are rising across the board, you are still in charge of how much you spend. There are multiple ways in which you can save money:

• Shop around for grocery deals.
• Cut back on luxuries or opt for cheaper brands.
• Make sure your home is energy efficient.
• Walk or cycle rather than using the car.
• Cancel any unused memberships or subscriptions.
• Learn some new skills to become more self-sufficient.
• The advice around energy bills changes day to day but it is worth keeping an eye on competing suppliers’ prices.

Earn Extra Money
If cutting costs is not an option, you may need to look at ways to earn extra money. For example:

• Pursuing a pay-rise or promotion at work.
• Taking a second job.
• Setting up a side business.
• Selling unwanted items.

While many households and businesses are facing pressure at the moment, remember that high inflation is partly caused by demand for goods and services. If you can find a way to meet some of this demand, there are plenty of opportunities for making extra money.

Reduce Tax
There are several ways to save on tax without significantly affecting your lifestyle. For example:

• If you are a basic rate taxpayer and your spouse earns under £12,570, you can claim up to £1,260 of their unused personal allowance. This can save up to £252 per year.
• Couples can also structure the ownership of any savings and investments so that they use both sets of tax allowances and exemptions. It can be efficient for the lower-earning spouse to own a higher share of any investments as they will pay less tax on the income generated.
• If you work from home or incur any expenses for your employment, you may be able to claim tax relief. You can find out more here.
• If you earn under £100,000 and pay for childcare, you could qualify for up to £2,000 per year to help with the costs. More information is available here.

Clear Expensive Debt
When costs are increasing, it’s a good idea to reduce debt as this can help to keep your household budget under control. In addition, high inflation usually leads to increased interest rates, which means that borrowing can become more expensive.

Aim to clear costly debt such as loans or credit cards and avoid increasing your borrowings. It may not be practical or advisable to clear your mortgage, but you may be able to secure a better deal or fix your interest rate.

Keep an Emergency Fund
Many families find that their budget is manageable on a day to day basis, but becomes problematic when the unexpected happens. Without an emergency fund, repairs, unplanned bills or periods of illness can be difficult to deal with. You may need to dip into investments or even borrow to cover the expense.

It’s a good idea to keep at least 6 months’ expenditure as an easily accessible cash reserve. This means that those unforeseen expenses become a minor inconvenience rather than a source of stress and worry.

Manage Risks
When your budget is tight, spending more on insurance can seem counterintuitive. But again, we need to think about contingencies. If you were to die or become seriously ill, rising costs could make things even more difficult for your family.

If you already have life, critical illness, and income protection insurance, you may want to review the amounts and the terms. Many policies offer the option to increase your cover, either annually or at the point of significant life events.

If you don’t have this cover in place, you should look into this as soon as possible. The longer you wait, the more expensive the premiums are likely to be.

Stick to Your Financial Plan
When you create a financial plan, it will only work if you follow the steps, regardless of what is happening in the market or the economy. This means:

• Continuing with pension and investment contributions, or even increasing them.
• Keeping your budget under control.
• Ensuring that risks are appropriately managed so that you have contingencies to fall back on.
• Investing sensibly, keeping enough cash available, and avoiding withdrawing money when the market takes a downturn.

A good financial plan, reviewed regularly, can help you to ensure financial security even when the world is unpredictable.

Please don’t hesitate to contact a member of the team to find out more about financial planning.