Inflation and how to weather the storm

Last month, the Monetary Policy Committee voted to increase the Bank of England Base Rate (BBR) from 0.75% to 1%. This is the highest that the BBR has been in 13 years, but still at a record low level when looking at the BBR’s history.

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Inflation is now thought to be running at approximately 7%, predicted to increase to 10% by the end of the year (not seen since 1982).

In theory, an increase to the BBR means that banks will pass the rate change onto customers – good for savers but not so good for borrowers. In principle, we’re encouraged to save and discouraged to borrow and spend, thus reducing the amount of money washing round the system, thus dampening demand which, should, stem inflation.

However, these are unusual times. An ease in Covid restrictions means that consumer demand has increased. But much of the inflation we are currently experiencing is known as ‘cost push’ inflation – an increase in the price of goods and services due to a squeeze on supply, rather than increase in demand. And the goods and services in question – i.e. energy and food – are, to a large extent, a necessity. The ability to dampen demand for eating, heating our homes and travelling to work is limited.

For savers, whilst any increase in interest rates should help, when considering the interest rates on offer relative to short-term inflation of 7-10%, real return on cash will still be negative.

More than ever, now is a good time to carry out a financial health-check. Here are some suggestions for protecting your financial health.

Outgoings – a spring clean

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Have you gone through your outgoings with a fine-tooth comb recently?  It’s so easy to put this off, or to think you have a good enough handle on your expenses using rough figures, but it really is worth making a detailed, itemised list of your outgoings – monthly and annually. Having your bank statement in front of you when doing this really helps with accuracy. Once itemised, it’s useful to highlight essential, non-negotiable outgoings in one colour, and purely discretionary items in another. Can any outgoings be cut or trimmed down? Are you getting value out of your memberships and subscriptions? If you can, cut out unnecessary costs, and aim to get value from every pound you spend.

Number 2

Debt review

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How much debt do you have? It’s worth making an honest list of outstanding balances on credit cards, loans and mortgages. Are you paying competitive interest rates? Could any of your debts be consolidated and restructured so that you pay less interest over the debt term? Being honest with yourself about your borrowings is key to being in control of the situation and managing cashflow.

For those with mortgages, it pays to know exactly when your current mortgage deal is due to expire. It can be possible to reserve a new deal up to six months in advance of your current rate expiring, so it’s worth speaking with your mortgage lender sooner rather than later.

Our relationship with money can be complex. If you find yourself struggling with debt or regularly worrying about it, the sooner you start speaking with someone, the better. Various support is available – for example, through Citizens Advice.

Number 3

Rainy day

Having completed the expenditure exercise above, you should now have a good idea of your essential monthly outgoings. As a rule of thumb, it’s a good idea to hold between three and six times this figure in cash as a safety net fund. For those who are retired and relying on invested capital to generate essential retirement income, it’s worth aiming to hold three years’ worth of outgoings in cash. This is to limit the risk of needing to draw on invested funds at a lower value than preferred.

When holding cash, it’s worth bearing in mind that the Financial Service Compensation Scheme (FSCS) protects up to £85,000 per individual, per institution. Money deposited with National Savings and Investments (NS&I) is 100% government backed.

Number 4

Invest in the rest

Whilst all investing carries a degree of risk, there is also risk in not investing – i.e., the risk that inflation poses to the real value of your money. Any level of inflation can erode the spending power of your cash. For example, 2% inflation would reduce the real value of £100,000 to just over £66,000 in 20 years’ time.

Once your ‘rainy day’ money has been set aside, it’s worth considering how the balance of your cash could work harder.

When investing, diversification is key. To help manage investment risk, it is preferable to hold a mixture of asset classes, and be exposed to a range of companies, sectors and geographical regions.

Whilst future returns can, of course, never be guaranteed, historic data shows that a balanced risk investor could achieve an average annual return of 3.5% a year after typical charges. Assuming this growth rate, the compounding effect of investment returns means that £100,000 would be worth over £198,979 in 20 years’ time.*

As invested funds fluctuate in value, investments should be held for the medium to long term to optimise the likelihood of experiencing positive returns.

*Source: Square Mile & FE fundinfo. Data as at: 31st March 2022

Protect your family

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When running through a household expenditure breakdown with a view to cutting costs, it can be tempting to cancel those life and health insurance Direct Debits that you took out ages ago and can’t even remember what they’re for. However, before cancelling, it’s absolutely worth assessing what your financial protection needs are. Do your current policies offer the right level and type of cover? Could you save money by applying for new policies? Are your debts fully covered on death or ill health? To achieve ultimate financial peace of mind, it’s important to know that worst case scenarios are covered and that, at least financially, you and your family are protected.  



The information provided is for general information only and is not intended to address the particular requirements of an individual or business.  It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.

Past performance is not necessarily a guide to future performance. The value of investments and the income derived from them can go down as well as up. Investors may not get back the amount they invested.

Menzies Wealth Management is authorised and regulated by the Financial Conduct Authority (486548). Registered address: 1st Floor, Midas House, 62 Goldsworth Road, Woking, GU21 6LQ Registered in England and Wales 06597008.

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