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How to keep your financial plans on track despite sustained inflation

Category: Blog
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Recent figures from the Office for National Statistics (ONS) confirm that UK inflation reached 5.5% for January 2022. The Bank of England (BoE), meanwhile, forecasts that the Consumer Price Index (CPI) will rise to 7% in the spring, before beginning to fall.

With the UK already in the middle of a cost of living crisis, what does rising inflation mean for your finances and what can you do to mitigate its effects?

Keep reading to find out.

Inflation is the rising cost of the goods you buy

CPI is the average cost of a basket of goods, representative of UK household spending. Back in May 2021, the BBC reported a doubling of inflation from 0.7% to 1.5%. By the following month, it had exceeded the BoE’s 2% target.

The rise was partly to do with the UK’s recovery from the coronavirus pandemic, exacerbated by rising fuel prices and the global supply shortage.

CPI has continued to rise in the months that followed and the BoE now confirms that it could peak at 7%. The Bank doesn’t expect inflation to return to its 2% target for some time – maybe not even until 2024.

The rising price of goods and services means that the money you spend won’t go as far. This is a particular issue while interest rates remain low. You could find that your cash savings struggle to keep pace with inflation, meaning that they are effectively losing value in real terms.

3 ways to combat rising inflation

1. The importance of budgeting

Keeping a grip on your income and outgoings is crucial at any time, but even more so during periods of rising inflation.

Everything from the cost of your weekly shopping to household fuel bills and the real-terms value of your pension withdrawals could be affected.

Budget carefully with your monthly income and think carefully about how you manage your disposable cash.

While it always pays to have an emergency fund – we usually recommend between three- to six-months’ worth of household outgoings – be sure you’re not holding too much. Your fund needs to be accessible in an emergency. This is likely to mean holding it in cash and we have already seen that your cash savings could lose value in real terms.

Revisit your emergency fund and if it contains enough to tide you over in an emergency, consider paying your future self by investing some of your disposable income, either in a pension or into an investment product like an ISA.

2. Risk versus reward and why now might be a good time to invest

While investing has risks attached – the value of your invested fund can fall as well as rise – the biggest risk to your wealth could be not taking enough risk. With your cash savings potentially losing value in real terms, investing could offer the chance to keep pace with, or even beat, inflation.

You’ll need to understand your risk profile and have a long-term goal in mind but the general trend of the markets is upward.

The online trading provider IG reported on historic FTSE 100 performance back in 2019. They found that over the five years up to the date of their report, the annualised return for the index was around 7%, rising to 7.3% for the 10 years to 2019. This is likely to be well above the returns you’ll see on your savings accounts currently.

Investment should only be entered into with a long-term goal in mind and a full understanding of the risks involved, but it can offer potentially inflation-beating returns.

3. Manage your pension income

One type of investment you might already be paying into is your pension. Paying your future self first each month – by contributing to a pension and budgeting with what remains – is a great way to set yourself up for your dream lifestyle in retirement. But what if you’re already retired?

You might have opted for an annuity that rises each year to combat the effects of inflation. This can be a great way to retain the spending power of your income throughout retirement. It will, though, reduce the annual amounts you receive initially.

If you have opted for drawdown, managing your withdrawals is always vitally important and we are on hand to help you, however far into your retirement you are.

The key to managing pension withdrawals during periods of high inflation is to withdraw only what you need. This is because any excess funds you take, but don’t immediately use, are likely to sit in your cash savings accounts. They will suffer the same effective loss in real terms as the rest of your cash fund.

Get in touch

Hartsfield Planning can help you stay on track to achieve your long-term goals whatever is happening in the wider economic world. If you would like to discuss any aspect of your long-term financial or retirement plans, please get in touch and find out how our team of expert planners can help.

Please note

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Get in touch

Ready to take the next step towards your financial goals? Call or email your local office to book a free financial consultation. Better still, pop in and see us. And if you’re short on time, just leave us a message here and we’ll call you.

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