As you’ve probably seen, inflation in the UK has reached a 40-year high and can affect your finances in a variety of ways. It can put additional strain on your monthly budget through the rising cost of living and it can erode the real value of your savings.

It’s natural to be worried about these issues. Although your financial plan is likely to have been developed with contingencies for these scenarios, rising inflation can affect your financial plan and you may need to make alterations to keep you on track for your savings and lifestyle goals.

Read on to discover three ways rising inflation can affect your financial plan and what you can do about it.

1. Inflation is rising faster than interest rates leading to diminishing real value in cash savings

Current events including the global energy crisis, ongoing pandemic and war in Ukraine, have contributed to inflation rising to high levels. According to the Office for National Statistics (ONS), inflation sits at 9.4% as of June 2022 and is likely to rise again further later this year.

The current rate of inflation is the highest it’s been in 40 years and has led to a cost of living crisis that has had damaging repercussions for the finances of many Britons.

The Bank of England (BoE) has been raising the base interest rate (1.25% as of 20 July 2022) in response. The BoE has overseen five increases in the rate since it was cut to an all-time low of 0.1% in March 2020 at the onset of the pandemic.

The base rate rising pushes banks to raise their own interest rates and should provide savers with better interest rates on their accounts.

Moneyfacts updates its website daily with the latest figures on savings accounts. As of 20 July 2022, it reports best rates of 1.5% on easy-access savings and 2.7% on one-year fixed-rate bonds.

While interest rates are increasing, even the best rates of interest are being outpaced by rising inflation. So, if you decided to simply leave your cash in savings, their real value would be eroded over time.

For example:

  • If you had invested £100 in easy access savings a year ago at a rate of 1.5% then it would be worth £101.50 now.
  • Meanwhile, £100 worth of goods and services a year ago would cost £109.40 now at the current 9.4% inflation rate.
  • You’d consequently find yourself £7.90 worse off when it comes to the real value of your savings.

In terms of your financial plan, it means, firstly, making sure that your cash savings are placed in an account that allows you to accrue the maximum earnings from interest.

Then, if you’re investing for a period of five years or more, it could be advisable to consult your financial planner regarding your wider portfolio. It may be worthwhile moving surplus cash into other investments to help your savings continue to generate the growth needed to reach your long-term goals.

2. How to adapt to the cost of living crisis and avoid making the wrong decisions

Almost every other UK-focused news headline seemingly revolves around the cost of living crisis. It has pushed financial worries and the necessity of household budgeting to the forefront of many people’s minds.

Keeping calm and making informed decisions can guide you through the current situation, and even help you make wise choices that will ultimately save you money in the future.

High inflation has meant that the cost of goods and services is spiking, while rises in wages and interest rates, are unable to keep up. Consequently, it has become increasingly important to review your personal budgets and lifestyle choices, to adjust for any reductions in your disposable income.

Making necessary cuts and reviewing if you have the best possible deals for essentials like utilities and travel will reduce the pressure financially and psychologically. It’s a simple step but it can provide reassurance and calm during these stressful times.

It is also important to not let fear influence your decision-making process. Firstly, that means not making any rash purchasing decisions. It also means that, while it may feel prudent to make cuts to areas such as your pension or insurance contributions to save during the cost of living crisis, this can actually be counterintuitive and hinder your progress towards your longer-term goals.

As the Scotsman reports, if a 25-year-old employee on average earnings reduced their pension contributions by 1% until State Pension Age, they’d lose out on £18,400 come retirement. If their employer matched that 1% reduction, then that value would double to £36,800.

If you’re considering cutting your financial protection – life insurance, income protection, critical illness cover – because you consider it non-essential, pause for a moment and have a rethink. Insurance policies are there to support you if the unexpected occurs and this is an especially crucial safety net during periods of financial uncertainty.

3. Interest rates are rising but are still historically low

Typically, as inflation rises, so do interest rates. This can have a positive effect on your savings as interest rates on accounts increase, but conversely it can have a negative impact on your debt obligations.

For example, if you’re not on a fixed-rate mortgage then you might be susceptible to fluctuations in the interest rate, which may end up increasing your monthly payments and the overall cost. This can also occur with any loans or credit card debts you may have if they have variable rates.

If your mortgage payments have risen in recent months, this may also affect your financial plan as you may have less surplus cash to save or to contribute to your pension.

While interest rates are rising, they are currently still at a historically low level. So, being proactive and opting to use any surplus cash in your savings – over and above your emergency fund – to overpay on any debt payments could reduce your obligations in the long term.

If you’re paying more interest on borrowing than you are receiving from your savings, then it could benefit you to repay some of this debt – especially if it’s on a high interest rate.

Get in touch

Financial plans are designed to protect your financial interests and keep you on a path towards your established savings and lifestyle goals.

If you are worried about how current events might be affecting your plan, don’t hesitate to reach out to your financial planner to help you alleviate any lingering concerns.

Contact us at helpme@aspirellp.co.uk or call 0117 9303510.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.