It’s been an eventful week in the UK, with two record-breaking developments in consecutive days. Unfortunately, rather than being a cause for celebration, both are doing more harm than good. 

On Tuesday, the heatwave pushed temperatures above 40C for the first time in the nation’s history, resulting in the busiest day for London’s firefighters since World War Two.  

Meanwhile, some 24 hours later it was revealed that inflation had exceeded forecasts to hit 9.4% in June, a new 40-year high, further deepening the UK’s cost of living crisis. 

But while the sweltering temperatures have thankfully since subsided, high inflation is set to stick around for a lot longer. 

Though the latest figures will come as little shock - this is the ninth month in succession that UK inflation has risen - you may be concerned about the potential impact on your finances. 

Gap between prices and earnings

As has been the case throughout this year, the main factors pushing prices upwards are energy, petrol and food, all of which are continuing to rise sharply. 

As a result, your savings, your outgoings and your business will be feeling the heat right now, especially given the widening gap between how much things cost and how much you earn; average wages are increasing by 4%, less than half the current rate of inflation.  

Forecasts suggests there will be little let up on this front, with inflation predicted to reach 11% in October when the next round of energy price hikes come into play.  

What’s next?

The government has said we may have to wait until 2023 before inflation begins to temper.

For many of you this may seem a long way off - you need to ease the burden on your finances as quickly as possible. 

So, on that note, let’s examine how rising inflation might be affecting you, and offer some tips on what you can do. 

Budgeting

Going through your spending and saving habits with a fine-toothed comb may sound like a thankless task, but it can really help you manage your finances when costs are going up. 

You may find that you’re forking out on needless expenses such as sports membership you no longer use or that you’re eating out more than necessary.

Although shaving a few pounds here and there can seem insignificant when viewed in isolation, in aggregate it could result in some notable savings. 

It might also enable you to identify numerous debts such as store cards, loans and credit cards that can be consolidated into one, making the repayments cheaper and more manageable. 

We appreciate that perhaps the biggest challenge you face here is getting started.

It's natural to find the process uncomfortable at first, but the good news is budgeting is a learned skill. The more you do it, the stronger your spending and savings habits will become. 

If you’re still stuck and could do with some more pointers, we have a handy guide that explains how you can get on top of things. 

Savings

Current inflation is proving particularly harmful to your hard-earned savings. 

Interest rates have been low since the financial crisis in 2008, when the Bank of England slashed rates to boost consumer spending.

However, until this year at least, inflation has also been relatively low, averaging 1.7% between 2012 and 2021. 

The current situation is strikingly different. The UK’s central bank has increased interest rates five times since December 2021 to its current rate of 1.25%, but this is 7.5 times lower than the current rate of inflation.  

The long and short of this is that your savings will erode in value if inflation is outstripping the interest you are earning.  

There are, however, some things you can do here. 

1. Tax-efficient investments 

A good place to start is to ensure you’re paying as little tax on your savings as possible.  

Individual savings accounts, or ISAs for short, offer a great way of going about this. This is because any growth, interest or income is completely free from tax. You can invest up to £20,000 a year in ISAs in either cash or stocks and shares or a combination of the two. There’s even the innovative finance ISA for those of you interested in investing in peer-to-peer lending, or the Lifetime ISA if your goal is to save for your first home or your retirement. For help deciding which ISA is right for you, click here. 

2. Consider stocks and shares 

With cash rates likely to lag inflation for some time, it’s wise to consider some alternatives. One of these is investing in stocks and shares, which can offer an effective way of protecting your savings from inflation. You should be aware that the nature of investing in the stock market means your money can go down as well as up. But if invested over a long timeframe, say five years or more, you should have ample time to ride out any periods of poor performance.  

If you’re new to investing in the stock market, and would like some tips on how it works, we have a comprehensive guide on how to get started.  

3. Seek advice  

If you’re still not confident about investing in stocks and shares, professional advice can prove invaluable. An independent financial adviser can help you choose the most suitable investment strategy for you, while also ensure that you’re making the most your tax allowances.

Find the right expert for you by clicking on the link below. 

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Businesses

If you’re a business owner, you will have likely seen your margins squeezed by rising costs during the first half of this year. And unless you’re happy to accept smaller profits, it’s important to explore ways of offsetting these increases. 

Of the 5.5 million companies in the UK, most are small. In fact, 75% of them have no employees.

Being small in size can have its advantages in the current climate. If you have no staff, you can’t be impacted by employee wage increases.

But on the flip side, the lack of resource means there are fewer ways of absorbing unavoidable cost pressures such as rising overheads.  

Business owners may also still be recovering from the effects of the pandemic, especially those of you in the retail and travel sectors who were forced to close for extended periods due to the series of lockdowns. 

You will therefore have some important decisions to make. For many of you, increasing prices to counteract higher costs will be inevitable, but this needs to be handled with care.

For instance, if your competitors hold prices steady, there’s a risk of business walking out the door.

A further option is to reduce costs by seeking out new vendors and suppliers. However, we sound a note of caution here - choosing the wrong one could prove costly. 

If you’re unsure which way to turn, seeking the services of a trusted accountancy firm can help.

They will explore ways of easing the burden that rising inflation is having on your business.

At Unbiased, we can match you with your perfect accountant, one who understands your specific challenges. 

If you found this article useful, you might also find our article on the 2022 mini-budget update informative, too.

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