What is the cost of living crisis?
In May 2022, the rate of inflation in the UK hit 9%, the highest it’s been for 40 years. It’s a complex issue, but essentially, inflation is bad news for savers.
The Bank of England also expects inflation to keep rising before any signs of let-up and so has raised interest rates in an attempt to keep pace.
Most immediately, the impact of high inflation is an increase in the face value of goods and services (prices are expected to rise by as much as +15% this year), with household energy bills already noticeably higher than before.
What’s causing the UK cost of living crisis?
The increase in the cost of living currently being experienced in the UK is being dubbed a ‘crisis’ because of how sharp this rise has been 🚀
The severity of the present situation is due to a combination of international issues. Energy prices have spiked as a result of the conflict between Russia and Ukraine, while post-COVID disruptions to the global supply chain have further pushed up the price of everyday items.
In April, the UK Government also raised the maximum amount that energy providers are permitted to charge customers… and so those suppliers subsequently raised their prices!
Add to that an end to the government’s VAT reduction for hospitality and tourism, which was temporarily lowered in the pandemic, and you begin to see why the rapid rise to the cost of living in the UK is causing alarm ⏰
Who does the cost of living crisis affect?
A big jump in the average amount being charged for energy is affecting all households 🥵 As is an increase to the National Insurance contributions employees must pay, which was announced in the 2022 budget.
Although skyrocketing prices affect us all, they disproportionately impact the finances of the most vulnerable in our society and so some groups (predominantly people on lower incomes) will be hit harder than others.
How can I fight the rising cost of living?
There’s no shortage of voices in the media suggesting that our finances might be salvaged if we were more willing to forgo a few lattes ☕️ But there’s a bit more to weathering this storm than simply tightening the purse-strings.
However, whilst not all financial struggles can be battled by budgeting alone, there are positive steps you can take to help counteract rising costs:
1. Strengthen your current position
Step one is all about quick wins, so this is a chance to identify where any immediate savings can be made in the form of unused subscriptions etc.
Take a look at all your monthly outgoings to ensure you have the best rate possible (even if it’s the best of a bad bunch) for your home energy (gas and electricity) and broadband, and shop around when renewing insurance.
Finally, even if you’re not scheduled for a pay review, in these exceptional circumstances your employer might be more receptive to renegotiating your salary to account for rising prices. If you’re not sure how to go about it, we also have tips on how to ask for a payrise.
2. Budget like a boss
When we need to make every penny count… it’s a good idea to start by counting every penny. And although the process of creating a budget might not sound like fun, it can be strangely satisfying to set financial goals and then witness the benefits of your hard work coming to fruition.
There are many ways to approach the creation of your budget, but we always suggest the ‘50/30/20 Rule’ as a great place to start.
The 50/30/20 Rule works by dividing your take home pay into categories. 50% is allocated towards needs (rent/mortgage, bills and essential travel etc.), 30% is allotted to your wants (the things that add colour to your life, like eating out, buying clothes, or going to gigs) and the final 20% is reserved for your future self (either clearing debt, or saving/investing for tomorrow).
3. Don’t get stuck in a saving rut
Once you’ve cleared any outstanding debt (excluding your student loan) and you have an emergency fund close at hand, you’ll need to decide what you want to do with your money for the longer-term 🌱
The most obvious solution might be to save the money in a Financial Service Compensation Scheme (FSCS) protected account that pays interest.
The interest offered on even some of the best performing Easy Access savings accounts is currently unable to keep pace with inflation, so another way to potentially earn a return on your money is to invest it.
Plum offers a simple range of investment funds that make the process intuitive for new investors. There are choices like Tech Giants, Slow & Steady, or options with an ethical focus, so you can start with £1 and select investments to match your own personal priorities 💅
Please remember that as with all investing your capital is at risk, because the value of your investments can go down as well as up.
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