Six ways to shield against the rising cost of living

 interactive investor outlines how to inflation-proof your finances.

Personal finances have come under immense pressure amid the rising cost of living, and tomorrow’s (19 January) official inflation number is widely tipped to indicate that UK consumers are not out of the woods.

The strain of the rise in the cost of living appears to have had a knock-on effect on investment picks. Personal Assets crept up the list of bestselling investment trust on interactive investor in December. It adopts a multi-asset approach and is one of a small number of wealth preservation trusts, with a policy to protect and increase shareholders' funds over the long-term by investing in equities, fixed income securities, cash and cash equivalents (which may include gold).

Another trust that seeks to preserve real wealth is Capital Gearing, was the seventh most-popular trust in December.

More broadly, the financial pinch brought about by the rising cost of living threatens to turn into a stranglehold for many household budgets in the coming months, with energy bills set to rise by up to 50% in spring, while the looming spectre of higher interest rates is expected to tighten the squeeze.

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The high inflation environment we’re in isn’t going to last forever, but it is important for people to consider how prices and their household expenses have changed and make the necessary adjustments to their finances to maintain financial resilience.”

Myron Jobson outlines steps to mitigate the worst of the impact from the rising cost in living.

1) Beat the National Insurance rise

National Insurance is set to increase from April, putting further strain on incomes with workers set to pay 1.25p more in the pound from their wages. The increase will hit the take-home pay of millions in the UK, resulting in an employee on £20,000 a year paying an extra £130, while someone on £50,000 will pay £505 more.

The change has increased the allure of employment salary sacrifice schemes, as they can be used to offset the forthcoming rise. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount into a non-cash benefit such as pension contributions and a cycle to work scheme. These benefits reduce the NI payable by the employee as well as the employer.

However, a lower salary can affect entitlements such as maternity/paternity pay mortgage applications based on one’s income and some state allowances. As such, people should always consider how such benefits could impact their finances more broadly.

2) Review your spending

Evaluate your expenditure and look for ways to reduce spending. For many households, hikes in the cost of food and fuel are most noticeable when prices increase. It’s important to note that inflation hasn’t hit all types of food evenly. Prices of favourite snacks such as crisps and soft drinks are among the biggest risers in recent history. Those looking to bolster their fitness this year could kill two birds with one stone by cutting back on such purchases.

Even simple things such as opting to purchase a store brand equivalent of traditional larder products can help to cut down the cost of groceries. If you’re anything like me and find it impossible to distinguish between store brand and premium brand rice, opting for the cheaper version can help save on cost, without compromising on flavour.

3) Work out your inflation number

If you don’t use a budget to manage your spending, it’s difficult to know where you stand. Everyone has their own inflation number – it’s worth keeping a spreadsheet of your own spending habits so you can get a better idea of the goods and services that are eating most into your budget, and where you could cut back. If you don’t have a budget, now is a good time to start one. Inflation is hitting everyone, but low-income households living on a tight budget with little room to spare are feeling the pinch even more.

4) Review your savings

Some of those who became accidental savers during pandemic, by keeping jobs while facing fewer outgoings during the Covid lockdown, may need to use some of the cash to tide them over during the cost of living crisis. Those considering locking their cash into a fixed rate fixed term deal for a better rate of interest should consider whether they’d need to access some of that cash if the cost of living continues to grow.

While the high rate of inflation means that most people’s savings are effectively losing value, it still pays to shop around for the best deal. Recent research by Moneyfacts found that savings rates either stayed the same or increased following December’s interest rate rise.

5) Fix your mortgage

Interest rates were bumped up from 0.1% to 0.25% in December and rates are tipped to rise further still this year. Mortgages become more expensive as rates rise. The 850,000 UK mortgage holders on a variable rate deal will feel the immediate effect of higher interest rates as their rate is linked to the Bank of England’s base rate. For those on a fixed-rate mortgage deal, new interest rates don’t apply until the end of their fixed period.

The past couple of weeks has seen the withdrawal of cheap fixed-rate mortgage deal, however, mortgage rates are still low compared to yesteryear, and there are still many competitive deals in market. Anyone looking to buy or remortgage in the near future should consider securing a deal now. Mortgage deals are often valid for a number of months, and it is not too early to start looking for the best deals now.

For some homeowners, funnelling some of the savings to overpay on their mortgage is a no brainer and a great way of saving a substantial amount in interest. There are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first.

6) Consider investing

Savings rates have gone up a smidge since December’s interest rate rise, but they remain far behind inflation. Cash savings accounts are generally not the best places to put your money long-term because it is eroded by the rising cost of living in real terms.

If you’re planning on putting money aside for five years or more, a good option worth considering is the stock market. While it fluctuates on a day-to-day basis, when smoothed over time, a well-diversified portfolio can offer sensible way to help beat inflation. Even a ‘middle of the pack’ fund is likely to compare favourably with cash over the long term, so you don’t need to be an expert stock picker to benefit.

Equities can help guard against inflation but returns not guaranteed and you have to be prepared for some bumps in the road.