With inflation at a 40-year-high and the Bank of England reacting by raising the base rate of interest to 3%, there hasn’t been a better time to start thinking about being more cautious with your money.
Unfortunately, inflation isn’t disappearing any time soon, with predictions that average prices won’t fall until mid-2023.
Here are ten tips for dealing with rising inflation.
1. Put some money away
Although it may sound obvious, a good way to deal with the rising cost of living is by putting some of your disposable income aside in a separate bank account.
By creating an emergency account as a safety net, you’re giving yourself options, especially if inflation stays high for longer than expected.
Again, the Bank of England expects inflation to begin falling in 2023 after a peak of around 11% in late 2022. It’s only in 2024 that it thinks inflation will settle back to normal levels. That’s a long time of higher prices, so be prepared.
2. Reassess your mortgage rate
As the Bank of England has said it will be reviewing its base rate as the year progresses, it might make sense to look into a fixed-rate mortgage rather than a variable rate.
Although some fixed-rate mortgages may last longer, they will protect you from paying inflation-based increases and save you money in the long term.
3. Make cutbacks if necessary
Understandably, people may want to take comfort in luxury items, especially if they are feeling the stresses of everyday life more often with rising bills and food prices.
But if you look at your spending habits, you may find you can make some slight cuts in places. For example, you can always look at cheaper alternatives regarding the shops you go to or the products you buy.
The same is true if you’re a business owner. Could you switch to a more generous supplier? Alternatively, could you buy in bulk, securing valuable discounts along the way?
4. Inflation-proof investments
Saving isn’t the only solution. Investing your money is the other – as long as you’re careful, so you make returns on the money you put away.
A cash ISA would usually be a good idea, but with interest rates currently below inflation, your money could just erode in value.
Looking into stocks and shares could be a good way of making a return on your investment, given that the economy tends to have a habit of bouncing back after hardship. But it still carries risk. If you’re new to investing, always talk to an expert advisor to ensure you make informed investment decisions.
5. Lower your household bills
Energy bills for the typical household are rising. The Government has announced a grant package for families across the UK who may struggle to keep up with payments this winter.
There are ways you can look into lowering your energy bills early. Things like turning down your heating, installing insulation or even doing your washing at a lower temperature will all work towards bringing down your energy consumption.
6. Buy property
Although inflation is rising, house prices fell earlier this year, with the typical asking price falling by 1.3% between July and August. Bringing forward your purchase could just be the lifeline you need.
By buying property and using it as a buy-to-let investment, you could gain an additional source of income as rent, raising or lowering it in line with inflation.
Our experts have years of experience dealing with tax planning, so they are perfectly placed to help you work out the most tax-efficient ways of investing in property.
7. Look into possible tax breaks
There are several tax-free savings accounts available for you to invest in. ISAs are a popular and tax-efficient way to invest money in the long term. You can save up to £20,000 in an ISA every tax year without having to pay tax on any interest earned.
You should also consider investing in your pension scheme to minimise your tax liabilities. The amount of tax relief you receive will depend on your taxable income, going as far as 45% in some cases.
There is a limit to what you can pay into your pension each year, with the annual allowance standing at £40,000. The lifetime allowance for pension investments is set at £1,073m and will be frozen until 2026.
8. Assess your business spending
It’s not just people’s personal finances that are feeling the pinch at the moment.
As a business, one of the first things you should consider is calculating your expenditure on inventory. If you see that you’re spending a lot of money with a certain supplier, consider cutting back on your ordering or even switching to a cheaper supplier. Even though it may not seem like a big change, it all adds up.
The same could go for your staffing costs. If you’re paying staff for overtime, you can always discuss this with them and shorten the amount of overtime being worked.
9. Consider raising some of your prices
Although raising your prices may not seem like the most attractive option, it’s worth considering. If you decide to go down this route, don’t raise all your prices simultaneously, as this may risk alienating your clients and customers.
Instead, study your margins. If you can slightly increase the price of your most popular products, or labour-intensive services, your customers and clients are still likely to pay for them regardless of the price change.
10. Talk to an accountant
While there is a lot of advice on how to save money, it’s always beneficial to have an expert by your side to help you sit down and analyse your finances.
No two individuals’ finances are the same, so it’s impossible for us to tell you what you should do in a blog post alone. By talking to us, however, we’ll be able to formulate a specially designed finance plan for you and you only.
The team at Pearson May is here to answer any questions about your spending and investments.
Get in touch with our team today.