How to inflation-proof your finances

We’ve all been feeling the impact of rising prices, on everything from groceries and petrol to energy bills and big-ticket items and inflation has reached a 41-year high of 11.1%.

“Globally, life is getting more expensive, thanks to a perfect storm of supply chain disruption driven by Covid-induced shortages and demand spikes, rising energy prices and too few workers for too many job openings, all of which push prices higher,” says Maike Currie, Investment Director at Fidelity International.

The Bank of England has raised interest rates to 3%, the largest rise in over three decades. Its forecasters expect inflation to peak at just over 13% at the end of this year and to stay at ‘very elevated levels’ for much of 2023, eventually falling to below the target rate of 2% in three year’s time.

So does all this represent bad news for borrowers and good news for savers? According to some financial experts, things aren’t quite that straightforward. Here’s what they said when we asked them what impact higher inflation would have on our personal finance and what we should be doing about it.

1. Switch up your savings

Easy access accounts and emergency funds

Interest rates on both savings accounts and cash ISAs have been unappealingly low for some time now, and continue to be nowhere near the rate of inflation. This has meant that there’s little to encourage savers to switch accounts to make their money work harder. In theory, the higher inflation rate should feed through into higher savings rates but, says Sarah Coles, senior personal finance analyst at Hargreaves Lansdowndon’t bank on it.

“Often a rate rise will be priced into the most competitive rates at newer banks before it actually happens. Meanwhile, other banks – including the major high street giants – may choose not to pass a rate rise on at all. The best way to fight the impact of inflation on your emergency savings is to put your money into newer online banks or building societies offering competitive rates.”

how to inflation proof your finances

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Long-term savings and investments

If you have a sum of money that you can lock away over the longer term – say, for five years or more – investing it in stocks and shares has good potential for inflation-beating returns.

“It’s hard to say exactly what impact this period of higher inflation will have on the stock market, mainly because we have never experienced this type of situation before,” says Emma-Lou Montgomery, associate director at Fidelity International.

“This is why the basic principles of investment are so important,” she adds. “Make sure you have money in a few different assets and parts of the stock market, be prepared to save for the long term and don’t panic. You’re likely to see the value of your money, for instance in your stocks and shares ISA, move up and down more than you are used to, but if you’re well diversified this shouldn’t be anything to worry about.”

2. Rethink borrowing

Credit cards

Higher interest rates are bad news for borrowers. “When it costs more for card companies to borrow, they pass this on through higher rates for customers,” says Sarah Coles. “If you’re carrying balances for long periods and paying higher rates, consider how you can control these debts and pay them down. If you have a good credit rating, one option is to switch to a card with a 0% introductory period on balance transfer and make a foolproof plan to pay the balance off by the time interest becomes payable,” adds Sarah.

One way to do this is to divide the balance on the card by the number of months in the interest-free term; this is what you will need to pay off each month to avoid accruing interest on the debt when the 0% interest period comes to an end. This can buy you some breathing space to make headway in paying off what you owe, rather than paying off the interest on the amount you’ve borrowed. For this strategy to pay off, you’ll need to not use the card for further spending.

Mortgages

The era of ultra-cheap mortgages may be over. Higher interest rates will feed through into higher mortgage costs — some lenders have already started to raise rates for new loans. So, if you’re on a tracker mortgage or your current fixed deal is coming to an end, check out the latest fixed-rate mortgages.

“You will have to pay slightly more if you are looking for long-term security, but you may look back with relief that you fixed your outgoings,” says Maike Currie. “Compare the cost of your current mortgage with what’s available on the market today and weigh up whether a change makes sense, remembering to check the terms of your current loan before making a switch.”

how to inflation proof your finances

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3. Pensions

Still working?

The advice is to keep doing what you’re doing. “Save regularly into your pension and make sure you aren’t holding too much of your money in cash. Over the long run your investment returns should win over any periods of higher inflation,” says Emma-Lou Montgomery.

About to retire?

“You might need to juggle some of your plans, save a bit less for a few months, or put a pause on taking money from your pension for a short time. But be sure to review this regularly as your financial situation might change,” says Emma-Lou.

Retired?

“With the scrapping of the earnings element of the state pension triple lock, pensioners relying on the state pension will find themselves exposed to a rapidly rising inflation rate,” says Emma-Lou.

What you should do to mitigate rising inflation will largely depend on what type of pension you have.

“The state pension is linked to inflation, so your income from that will increase, and defined benefit pension schemes are also inflation-linked. If you have a defined contribution pension, like many people, you’ll need to check the money you’re withdrawing isn’t reducing the size of your savings too quickly.

“Where you can, stay invested so your savings are still growing and keep diversified. This means investing money into lots of different assets, like gold, and parts of the stock market.”

how to inflation proof your finances

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4. Household bills

Budgeting

It’s more important than ever to make sure you know what you’re spending and living within your means. That means budgeting, says Sheena Doherty, senior wealth management consultant at Sovereign Wealth.

“Write down where the money goes – whether on an app or excel spreadsheet, and set up three columns: essentials, non-essentials, and luxuries. Make sure you’re aware of the minimum you need every month to cover the direct debits, and don’t forget to review them, too. You need to be in a position where, if you have to reduce luxuries or non-essential by 20-30% because that money is needed in the essential column, you’ve got the financial flexibility to move it.

“The grocery bill is probably the biggest area of ​​your finances that you can influence,’ says Sheena. ‘It’s about being a sensible shopper; having meal plans, buying things when they’re on offer to put in the freezer, then factoring them into the next week’s meals.”

energy bills

By now, we’re all only too well aware that the cost of household energy bills is soaring. The energy price cap (the most your energy supplier can charge you for the energy you use if you’re on a default energy tariff) increased by 12% in October 2021 and jumped by a massive 54% in April this year. The Energy Price Guarantee came into force in October 2022, the same day that the Ofgem price cap was set to increase to £3,549 a year, and making the average energy bill £2,500 a year.

If you’re on a fixed rate energy tariff, check when this is due to come to an end and use a price comparison site to research alternative deals ahead of this.

Where to get expert advice

• For pensions and investing advicefind an independent financial advisor online at Unbiased or VouchedFor.

• Compare instant access accounts and cash ISAs at comparison sites because rates are starting to edge up.

• If you’re self-employed, working on a zero hours contract, Moneyhelper.org.uk has good advice on how to budget for an irregular income.

• If you’re 50 or over and have a personal or workplace pension, book a free one-hour appointment with Pension Wise at moneyhelper.org.uk.

• Use apps like Money Dashboard and Snoop where you can view all your accounts and track your spending by category.

• Struggling with bills? Get free advice at Stepchange.org and nationaldebtline.org.

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