Living Costs and Life Goals

With rising living costs, financial planning and life coaching are more important than ever, helping you to live longer and more healthily.

The recent rise in the prices of our supermarket shop and petrol station refill are pressuring all of us to minimise outgoings. With inflation currently at 9.0%* and potentially set to increase further, it is a factor that cannot be ignored. No one can escape the eroding power of inflation and we all need to review our finances to ensure that our plans are on track. We’ve identified a few key points below that would make good financial sense for us all and also help us to attain those life goals that we’re reaching for.

Cash

Are you holding the appropriate amount of cash? It is important to hold an emergency reserve plus any cash required to cover any short term income shortfalls or capital expenditure plans. Often people are holding excess cash, particularly during the pandemic when many individuals were able to save whilst foreign holidays and many leisure activities were not available. Typically, current and savings accounts are offering between 0% and 1% interest presently. In real terms that is accepting a 8%+ per annum loss on these monies at current rates. Therefore putting spare cash to work in expected higher yielding investments for the long term may prove fruitful.

For cash that is required to be held, The Bank of England has started raising interest rates and more rises are expected to follow to help curb inflation, but this is unlikely to make significant differences to legacy current account holdings. Banks rely on customer inertia to minimise paying interest for holding your money so it is good practice to periodically review the interest you are getting and potentially switch accounts. There are instant access savings accounts currently offering 1.5% with no fees and fixed term accounts offering 2%-2.5% depending on term length. This may not sound earth shattering compared to historic rates but it is important we do not anchor ourselves to the past - some return is still better than none. To put this into context, moving £25,000 from a current account paying no interest to a 1.5% instant access saving account provides a return of over £1 a day in interest (£375 over a year) – broadly, that is equivalent to the average family food shop for a month**. Given many bank accounts can be opened online/via phone in around 10 minutes and some offer cash incentives to switch of up £175, this can provide a healthy return for the time spent in switching. Comparison sites make it very quick to compare rates available so do not let apathy win!

With interest rate rises expected, longer term fixed deposits may be locking you into a rate that could be bettered tomorrow so shorter duration or instant access keeps your options open to secure better rates when they become available.

Debt

Do you have a mortgage? With interest rate rises expected, it is worth reviewing your rates. If you are currently on a fixed rate for a term then it can be expensive, with early redemption charges (ERCs) to come out of this; however, you can usually agree a rate 3 to 6 months before the end of the term to potentially secure a lower rate sooner rather than later. It may even be worth paying a small ERC to secure a lower rate now. While mortgage owners have benefitted from historically low interest rates for the last 10 years or so, these levels are unlikely to return in the foreseeable future so the opposite applies to cash holdings – securing a longer duration mortgage to benefit from a lower rate for longer is prudent. If you are currently on a tracker mortgage then now might be the time to consider fixing a rate. If servicing debt costs is likely to rise then paying down some debt with surplus cash may also be a consideration.

Credit cards can be useful in managing cashflow and many offer helpful rewards and features. However, the interest rates on credit cards can be very costly, often in excess of 25% APR. Get into the habit of paying off credit card balances in full every month or by any 0% interest free period offered. You can set up a direct debit to do this so there is no danger of forgetting! As with cash accounts, use comparison sites to review whether your current credit card(s) are best for you.

Budgeting and Planning

Do you have a weekly/monthly budget? Do you regularly review this budget? Do you think about your budget before making purchases? If the answer to any of these questions is ‘no’ then you are likely to be wasting money. Creating a budget and letting this guide your expenditure decisions focuses the mind on what you are spending and so you are less likely to impulse buy, have less wastage and buy at lower prices or get better value from your money. The obvious example is food shopping. Planning your meals in advance means you are less likely to buy surplus food, eat out or buy takeaways which typically causes food budgets to spiral. In addition, if you are aiming to lose weight then planning meals and only buying what you need means those naughty impulse treats that wreck diets are less likely.

This habit applies not just to food but many other goods such as cars, clothing and electricals. We all have our favourite brands and do make impulse purchases, and there is nothing wrong with this to a degree, but do not let your brand loyalties rule your finances and prevent you meeting your financial goals. Minimise these where suitable, lower cost alternatives are readily available.

Summary

Managing finances can be stressful. There are many elements that are outside of our control such as global equity market performance, inflation and interest rates. However, by budgeting and managing cash, you have a much greater control so it is important to own the responsibility for these as nobody else will. While some of the above suggestions may appear to only make a small difference, collectively and over time, these can make a substantial difference to meeting long term financial objectives. It is a myth that personal planning has to use up lots of your time and energy. The key is making it become a habit, so you plan and organise automatically and with ease. Knowing you are in control of what is controllable helps reduce the stress of worrying about finances, hence the bold claim that financial planning can improve your health!

This article was prepared by James Martin, a chartered financial planner at CAM. We always appreciate your feedback. If you have enjoyed this article or have any specific topics you would like to see addressed in future newsletters, please email us at FPTeam@city-asset.co.uk.

* CPI 12 month change – www.ons.gov.uk/economy/inflationandpriceindices

** www.nimblefins.co.uk/average-uk-household-cost-food#week