We are all feeling the impact of recent price increases whether it is our grocery shopping, fuel or energy bills. The IOM Treasury Minister announced in Tynwald this week that inflation could peak at 10% on the island later this year. Inflation hasn’t been this high for decades so many of us are wondering how best to navigate it.
What is Inflation
Inflation measures a change in prices of goods and services over time and is calculated by Government. They track price changes in a basket of typical goods and services including for example food and drink, clothing, transport and energy costs.
If the inflation rate is 3% it means that prices in general are 3% higher now than they were this time last year. A basket of goods and services that cost £100 a year ago would have cost £103 this year. So, £100 now, is worth less in real terms than it was less than it did a year ago as it will buy you less goods and services.
There are a few reasons for this increase – including goods supply issues due to the pandemic, as well as oil, gas and other exports from Russia and Ukraine currently being put under strain due to the war in Ukraine.
While we are experiencing this rise in costs, let’s consider ways of inflation proofing our finances both in the short and long term.
Day to Day Finances
We are going to feel the impact on our day-to-day finances quickly with rising costs for home heating, transport, electronic goods, building materials and even basic foods such as bread and pasta.
If you are already on a tight budget, any rise in prices will put a further squeeze on your spending. Budgeting will help you to make sure you know what you are spending and to live within your means.
By analysing your bank and credit card statements over a couple of months, you will see where you are spending and if there are any areas you can trim down. For example, are there any subscriptions that you accidentally signed up for that you could cancel?
If your supermarket shop is costing more each week, can you switch any of the things you buy. For example, are you able to trade down from brands to own-brands? Can you freeze more foods to ensure they last longer? Or buy foods when on offer and freeze them?
We have all seen costs for petrol and diesel rising sharply, and the UK Government have recognised this with a cut in duty to lower the costs slightly. It is hard to cut down on car fuel usage as we need to get to work, drop children to school, visit friends and travel for various reasons.
The IOM Government has announced various support schemes to assist those on low-incomes, families and pensioners.
- An Energy Support Payment of £300, to households responsible for housing costs and receiving income-related benefits which is expected to benefit up to 3,000 IOM households.
- A Family Support Payment of up to £300, dependent on household income, available to families receiving Child Benefit, with additional payments for two and three children households.
Follow the below link for full details:-
Borrowings
When inflation is rising central banks will often raise interest rates try to control it. We have benefited from low interest rates for several years which has been great for borrowers but not good for savers.
The Bank of England have recently increased its interest rate by 0.25% and the first place we will feel this increase is on borrowings with variable rates whether that is on credit card balances or variable rate mortgages. If you have credit card balances, try to pay these off as soon as possible or maybe switch providers who offer a 0% introductory period on balance transfer. But remember to pay off the balance within the introductory offer time, or you will be back to paying higher interest again.
Anyone on a variable-rate mortgage with no early repayment charge or nearing the end of a fixed-rate deal, should consider one of the current low-rate mortgages on the market while they are still available.
You should always seek advice before you make any changes to a mortgage. Switching or locking into fixed rates may not always be the best advice for you, depending on the type of mortgage you currently have, as well as your short and long-term plans for the property.
A mortgage broker will be able to advise on the mortgages available to you from several lenders.
Buy Sooner
If you are planning any large purchases in the coming year or two, such as upgrading your car, home improvements or holidays, be aware that the costs of these are also rising.
There are warnings of shortages on items such as building goods which could push costs of home improvements higher. If you have the money already put aside and do not need it for other costs, it may be better to consider buying these items now or looking at home improvements sooner.
If you can afford to book next summer’s holiday now, for instance, it may save you cash in the long term.
Investing your Long-Term Savings
Beyond your emergency account (which is best kept in an easily accessible deposit account) and after putting aside any money you need for items in the next five years (also in a deposit account), you should consider investing to seek returns which will try and inflation proof your savings over the longer term.
Let’s do a comparison using the earlier inflation example, where a basket of goods and services that cost £100 last year costs £103 this year, therefore an inflation rate of 3%.
If you had put £100 in a deposit account last year, which returned say 0.5% per annum on average, then your £100 would have grown to £100.50. So the real return would be minus -2.5%, with the impact of inflation of 3% on the return of 0.5%.
In other words, your money would have lost some of its value by sitting in a deposit account. As inflation is currently rising so sharply, this loss in the value of your money in deposit accounts will be even greater and when interest rates do increase, they are not going to be increasing by current inflation rates.
Investing involves saving regular amounts or a lump sum of your money into a fund that in turn invests in assets such as bonds, property and stocks & shares, which will offer the potential for inflation beating returns. Investing money always comes with a degree of risk though, so seeking financial advice is essential.
There are many types of investments available to suit people from low, medium to high risk. The level of risk you take will depend on how you feel about investing as well as the length of time you have for your investment.
Speak to a financial adviser who will be able to guide you with the type of investment most suitable for your needs and the level of investment risk to take.
