Useful personal finance tips to manage inflation

Households need to brace for a prolonged period of high inflation and further interest rate rises. The Governor of the Bank of England, Andrew Bailey, has warned that he will take forceful action to tackle inflation, already running at 9.4% and forecast to hit double figures later this year. He defended the decision last week to raise interest rates, saying there is a "real risk" of soaring prices becoming "embedded". Interest rates rose to 1.75% - the biggest rise in 27 years - with inflation now set to hit more than 13%. The UK is forecast to fall into recession this year, with the longest downturn since 2008 predicted. Increasing interest rates is one way to try to control inflation as it raises borrowing costs.

Inflation is a problem for most of us. Savers find that the value of their cash is being rapidly eroded. At 10% inflation, the £100 you save today will only buy £90 worth of goods in a year’s time. Many people find that their household budgets are stressed. And even borrowers, who might be expected to benefit from inflation, suffer when inflation triggers increases in interest rates. So what can you do to protect your finances and combat inflation?

1.   Protect your retirement income.

Inflation has an enormous impact on how long retirement savings will last. The income that seems more than adequate when your start your golden years can look less than generous after 10 years of inflation, and a recipe for misery after 20.  A basic level annuity will mean having the buying power of your income eroded every year. An inflation-linked annuity will start off providing a much smaller income, but one that keeps increasing over time. A drawdown pension – where your pension pot remains invested and you draw down an income as you need it – is more flexible. However, you will still need to take care to avoid running out of cash.

2.   Avoid locking your cash savings away.

Savers should benefit when higher inflation leads to the Bank of England increasing the Bank Rate. But beware – although the rates offered by savings providers are rising, they have not yet done so enough to come anywhere near inflation.

However, with the Bank Rate forecast to rise further and with savings deals forecast to follow, there could be better deals to be had over the next few months. Shop around for the best deal and avoid locking your savings into a long-term deal because it could mean missing out on much better rates in the near future. 

3.   Look at your investment strategy.

In an inflationary world, investing – where your cash is used to buy something which could appreciate in price – could be more rewarding than saving.

While inflation erodes the value of cash savings, it actually works to boost the value of some investments. But how should you invest? Bond investment becomes less attractive in times of inflation, as the income provided by bonds is subject to inflation.

Investors can protect themselves by buying index-linked bonds, where the interest paid rises in line with inflation. Some business sectors will suffer during inflationary periods. Oil and mining companies, however, tend to do well as rising commodity prices are good for their bottom lines. Utility groups often pay dividends linked to inflation. However, inflation could be bad for others such as retailers and supermarkets, which may lack the ability to increase prices. Luxury goods may be shunned when households tighten their belts.

4.   Secure a low-rate mortgage before rates rise.

Inflation has already triggered rate rises, and mortgages are substantially more expensive than they were last year. This process could continue – the Bank of England has hinted as much. To avoid increasing interest costs, which could mean that buying your home becomes difficult or even impossible, it makes sense to secure the lowest rate you can, fixed for the longest possible period.

5.   Get some expert help.

Managing money in inflationary times can be challenging, but the challenges can be much more manageable if you have an expert to call. Talk to your financial adviser, or if you don’t have one, see: Choosing a financial adviser | MoneyHelper

 

Inflation at its highest rate in over a decade

Consumer prices rose by 4.6% in the 12 months to November 2021, according to the lead measure of the Consumer Prices Index including owner occupiers’ housing costs (CPIH). This is up from 3.8% in the year to October 2021. Annual inflation rates at this time are influenced by the effects of coronavirus (COVID-19) in 2020.

The Consumer Price Index (CPI) also rose from 4.2% to 5.1% in November 2021.

A wide range of prices contributed to the rise in inflation, with the largest upward contributions coming from motor fuels as well as clothing and footwear, where prices rose this year but fell a year ago.

See: UK economy latest - Office for National Statistics (https://www.ons.gov.uk/economy/economicoutputandproductivity/output/articles/ukeconomylatest/2021-01-25#inflation)

Inflation: UK prices increase at fastest rate for almost ten years

The cost of living has surged at its fastest pace in almost 10 years, with the Consumer Prices Index (CPI) reaching 4.2% in the year to October. It is primarily due to higher fuel and energy prices but the cost of second-hand cars and eating out also increased, the Office for National Statistics (ONS) have said.

Inflation is up since Covid restrictions ended this year and the economy reopened. The Bank of England says it may have to raise interest rates in the "coming months" to tackle rising prices. October's reading is far higher than the 3.1% rise recorded in the year to September and more than double the Bank's target of 2%.

The latest report from the ONS shows the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.8% in the 12 months to October 2021, up from 2.9% in the 12 months to September.

The largest upward contribution to the October 2021 CPIH 12-month inflation rate came from housing and household services (1.23 percentage points), with further large upward contributions from transport (1.08 percentage points) and restaurants and hotels (0.43 percentage points).

What does this mean for businesses?

Rapidly rising inflation can mean consumers are more cautious about making discretionary purchases and it’s a good idea to avoid sudden price rises that encourage consumers to look around for cheaper alternatives. A gradual plan for price increases is probably a more sensible option for businesses.

Inflation will also affect the prices you pay for stock and other expenses, so now is a good time to reflect on your stock levels and consider alternative sources of supply and review the profitability of your products, goods and services to ensure they are and will remain profitable.

Clearly, in these uncertain times, it is a good time to plan ahead and here are a few ideas to help with remaining resilient:

• Review your Budgets and set realistic and achievable targets for the remainder of 2021 and 2022;
• Get rid of Won’t pay customers;
• Review debtors list and chase up overdue invoices (if appropriate);
• Make sure your terms of business contain explicit payment terms;
• Assign responsibility to one individual for invoicing and collections;
• Agree extended payment terms with all suppliers in advance;
• If appropriate, review banking facilities and discuss future needs;
• Put extra effort into making sure your relationships with your better customers are solid;
• Review and flow chart the main processes in your business (e.g. Sales processing, order fulfilment, shipping etc) and challenge the need for each step;
• Encourage your staff to suggest ways to streamline and simplify processes (e.g. sit down and brainstorm about efficiencies and cost reduction);
• Use ‘bottom up’ budgeting where everyone in the office gives input on areas over which they have control – target a 10% cost saving;
• Review your staffing needs over the next few months; 
• Get your members of staff involved in a discussion of likely trading conditions and get their input on reducing costs and maintaining revenues;
• Review your list of products and services and eliminate those that are unprofitable or not core products/services;   
• Establish your key performance indicators (KPI’s) and measure them on a daily basis e.g.:
-Sales Leads generated
-Orders Supplied/Fulfilled
-Cash Balance
-Stock Turnover
-Debtor Days
-Gross Profit
-Net Profit; and
• Pull everyone together and explain the business strategy and get their buy-in.

Please talk to us about planning ahead because we have considerable experience with helping our clients with their strategy and sustainability in turbulent times. 

Inflation, tax rises – and the family budget

Apart from the human cost, covid has cost us all a great deal. In the first year of the pandemic, from April 2020 to 2021, the government borrowed £299bn, the highest figure since records began in 1946. Another £200bn will be needed this year, and as taxpayers, we will be paying for it all.

But the covid costs don’t stop there. The low interest rates vital to restart the economy are also helping to restart inflation.

So, what does this all mean for the family budget?

Inflation is back

Inflation is a measure of rising prices and affects what you can buy for your money. Covid and lockdown reduced economic activity, eliminating the inflationary pressures that were becoming a worry at the beginning of 2020. The cost of some goods fell early in the pandemic in response to a collapse in demand.

Now, as the economy starts to recover, pent-up demand and supply chain bottlenecks are already creating severe price pressures. There are already shortages in some key sectors such as semiconductors. Scarcity inevitably means price increases.

It looks as though the process of inflation has already begun, when earlier in the year, inflation data was released the figures were higher than expected, passing the 2% mark. Now it is forecast to potentially increase to over 5% by 2022, well above the Bank of England’s 2% target. The typical household spent just over £20,000 in 2019, the last pre-Covid year, according to the Office for National Statistics (ONS). Inflation rises would push up the bill for those same goods and services substantially.

National insurance and taxes are going up

National insurance contributions (NICs) paid by both employed and self-employed workers will rise by 1.25% in a bid to help fund health and social care costs. From 2023, the health and social care levy element will then be separated out and the exact amount employees pay will be visible on their pay slips. It will be paid by all working adults, including workers over the state pension age – unlike other NICs. This means an employed basic rate taxpayer earning £24,100 a year would contribute an extra £180, while a higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100 a year would pay £715.

In the March Budget there were minor increases to the £12,500 - and £50,000 - income tax thresholds to £12,570 and £50,270 respectively but these are frozen until 2026. These thresholds – which determine how much a person can earn before paying income tax, and who will pay at the higher 40% rate – usually rise with inflation, now they will not. So, we could all be paying more tax over the next 5 years.

All these increases add up to increased pressure on the family budget with higher prices and more taxes. Wages may be on the up – but probably not by enough to compensate for the added costs and tax rises.

Please talk to us about planning ahead because with some help you may be able to make your money work harder for you and reduce the amount the taxman can take.

Your financial plans may need a fresh look, and you may need an expert to help you. We are ready to provide all the help you need.