The cost of living big squeeze is on. From rising bills to spiralling inflation, the year ahead looks tricky for all of us.

But why is it happening, how long will it last and what can you do to protect your money?

What is the big squeeze?  

It has been a difficult start to the year for consumers.

While individuals have already been balancing rising inflation and more expensive petrol prices, households have been further hit by drastic increases in their energy bills, council taxes, national insurance contributions and even the affordability of public transport.

With everything getting more expensive, the next few years are set to bring some challenges.  

Why is it happening?  

There’s no single explanation for why everything is becoming more expensive, but one broad factor is the ongoing fallout from the pandemic.  

From energy prices to inflation to struggling health services, the pandemic has played a role in much of the turmoil currently facing households.

A colder-than-usual winter with almost all of us at home and using the heating has not allowed energy firms to refill low supplies.

Income support schemes such as furlough and ongoing supply chain problems have created lots of consumer demand and helped drive inflation.

A backlog of individuals needing attention from the NHS and social care has led to tax rises to help fund the shortfall, and on top of all of this, the Bank of England recently raised the base interest rate to try and stave off price increases – potentially meaning more debt for people with mortgages. 

While financial challenges are affecting countries around the world, the UK’s issues are particularly acute meaning that many households may struggle to keep on top of their bills and costs. 

How will the big squeeze impact you?  

An increasing cost of living impacts everyone differently.

Whether you’re saving for your first home, are trying to make ends meet or are trying to save for the future, it may be time to start protecting your money. 

Saving for your first home? 

If you’re saving for your first home, you may be most impacted by the rising base rate.

The interest rate determines the cost of borrowing – if the interest rate is higher, it will be more expensive to borrow money.

The recent increase in the base rate means that any mortgage you look to take out will now almost certainly come with larger repayments in the future.

So, when it comes to shopping around for the right mortgage, be prepared for more expensive offerings.

Frustratingly, it is possible that there will be a number of interest rate rises to follow throughout the year, so make sure you keep a close eye on future changes. 

Another challenge to consider is that while you will want to save enough money to meet these larger repayments, other rises in the cost of living mean that you could find this more difficult.

Think about using a mortgage broker to help you find the perfect deal, and build a savings plan that will help you keep up with larger monthly repayments.  

Self-employed?  

If you’re self-employed, your finances, those of your business or those of your clients may be adversely affected.

For your personal finances, assess whether:  

• you will be able to keep up with mortgage repayments 

• have enough or any savings to fall back on and whether you can continue to save some of your monthly income 

• you need to cut back or change your outgoings 

Depending on what sector your business works in, you may find your business impacted by inflation, which could in turn impact your personal situation. Consider:  

• how vulnerable your business is to supply chain disruption 

• whether you have to raise the prices of your goods or services 

• whether your clients or customers may cut back on spending or budgets and where that would leave your business. 

Saving for your children’s future education?  

If you’re looking to save money to go towards your children’s education, a rising interest rate may be beneficial to you.

With the UK having low interest rates for many years – with extremely low rates during the pandemic period – many families have not been able to build up the savings they may ideally have liked and instead have put money into ISAs or investments.  

While the current rate of 0.5% (February 2022) is still some way away from matching the returns you could get on an ISA, a rising interest rate may make opening a savings account with a commercial bank an option worth considering.

As stated already, it is possible that there will be further interest rate rises to come, making savings accounts even more attractive.  

If saving for your children’s future is your priority, consider putting your money into: 

• a savings account 

• ISAs 

• children’s bank accounts 

• child trust funds 

How long will this squeeze last? 

There’s no concrete answer to how long this additional pressure will endure, but according to the Bank of England, the current rate of inflation could last until the second half of 2022, before eventually returning to more normal levels at some stage in 2023.

So, while the current rate of inflation might be as bad as it gets, it could still have a lasting impact on your finances and in any case, there are several months of financial challenges still ahead.  

What steps can you take to protect your money?  

When the Bank of England raises interest rates, it is telling people to begin saving and protecting their money.

If you’re concerned about securing your financial future, consider what changes you could make to future-proof your finances. 

• Do you have any outstanding debts? Start by paying off as much of these as you can. 

• Decide if you need to make any immediate changes to your living standards – do you need to remortgage or consolidate your debts? 

• What kinds of savings are you looking for? Are you looking for greater returns and potentially taking more risks or are you looking for steady returns with less risk? 

A squeeze on living standards can be frustrating and a cause for concern, but by taking the right steps to protect your money, you can keep your financial goals within reach.

For more tips, guides and help, make sure to visit our cost of living advice page.

Speak to an independent financial adviser to see how you can plan for whatever comes next.