Much has been written and spoken in recent weeks and months about the Cost-of-Living Crisis, and the challenges this is causing for all of us in our everyday lives. No matter who you speak to, you will get a slightly different perspective of what is behind the situation we face, and that is to be expected as there are so many factors.
When you look back at the financial markets and how they have performed historically, you will see an upward growth trajectory over time, and that line shows a constant level of volatility, impacted by global events as time has passed. We are currently in such a volatile period, and this follows quickly on the heels of the pandemic, itself a major factor in market volatility. So, what else is happening that is causing uncertainty around the world?
Political change and decision making such as Brexit for instance. Irrespective of your views on whether Brexit was right or wrong, Brexit changed the dynamic between the UK and the rest of the world. It changed how we trade with different countries, how we import and export, where people live, and the availability of skilled resources.
The Pandemic led to most countries having to borrow vast sums of money to support their financial infrastructure, to help create packages of support for businesses and individuals, money which comes with a cost of borrowing, as it must all be repaid somehow.
The War in Ukraine is well documented, and ongoing, featuring daily in our news feeds. What many people do not realise is the global dependency on both these countries for minerals, grain and for energy supplies. For example, Ukraine is a key supplier of titanium and lithium, and Russia and Ukraine are both significant contributors to the global supply of wheat.
Manufacturing challenges brought about by the shortage of raw materials, particularly those sourced in Russia and Ukraine, have resulted in companies not meeting demand, with the costs for products and services increasing.
The shortage of wheat, for example, is creating shortages of certain types of food, and with drought like conditions following a hot summer here in the UK, crop output has also been hindered, and it has impacted the farmers ability to re-sow the land. Issues such as these are pushing prices higher, and the UK is not alone, resulting in imported goods also becoming increasingly more expensive.
The energy crisis and the increasing price cap have been well documented. The government has intervened to limit prices rising higher and freezing the cost of energy for homes and businesses, but this has resulted in increased government borrowing. The cost of gas, even before the war in Ukraine, was causing an issue, and the supply shortages created since the war started have only added to that price pressure. In the UK, we are still reliant on fossil fuels as a source of energy and on gas in the power plants.
Many of the issues listed above have contributed to the levels of inflation that countries worldwide are currently struggling with, as the cost-of-living pushes inflation higher, as well as the increasing cost of fuel. But what is inflation? The Office for National Statistics measures the prices of everyday items in the UK, and Inflation is the term we use to describe rising prices. How quickly prices go up is called the rate of inflation. Falling costs of oil, the energy price cap freeze and increasing interest rates are all factors that will help reduce the level of inflation reported, though there is no single driver for bringing it under control.
Interest rate increases, as mentioned, are one factor in helping to bring inflation down but, equally, whilst they boost savings with interest earned, rate increases also push up the cost of borrowing, and in particular mortgages, with many providers removing rate offers and this beginning to cause some unrest to the housing market. One issue we cannot ignore is the increasing cost of a mortgage meaning a bigger squeeze on people’s income, and as such, adding to the cost-of-living crisis.
It does not make for pretty reading, but for many of us, we are not able to influence any of the factors listed so far.
Legal and General undertake a study called ‘Deadline to Breadline’ and the 2022 findings have now been released. They state the objective of the study as follows: “Our objectives for this study included assessing the financial stability and resilience of people across the UK; understanding how long it would take to reach the ‘breadline’ if someone were to lose their income; and establishing what prevents consumers from engaging with their financial plans.” Generally, people believe they can survive on average 60 days, though in reality the study highlights that people are more realistically 19 days on average from the breadline, with almost 2 million adults who have no money left each month, an increase of 330,000 in the last 2 years. *2
So, what can we do to help ourselves?
What follows are some thoughts on things we can all do and should be always doing to help improve our financial stability, and ability to plan, save and invest towards our medium- and long-term goals and aspirations. In the short term, we need to provide for ourselves and our families. Winter is upon us after what can only be described as one of the best summers the UK has had for some time, and with that a need for heating our homes.
A cornerstone of any financial planning exercise is budgeting. I can hear people yawn as they read this sentence, thinking “oh my days, I am about to be told to create a spreadsheet.”
Well, that is one way of creating a budget, but there is nothing wrong with a piece of paper and a pencil/pen. Reviewing your spend over a 12-month period, and truly understanding your income and your outgoings can be very cathartic, and eye-opening. In today’s world of tap and pay, rather than using hard cash, we can lose track of how much we spend. Looking back across a 12-month period allows you to identify which cost items are regular, which are essential and as such, you need to spend every month, and those areas of expenditure that are discretionary. This means that whilst it may be necessary, you could get by without it, such as a gym membership, or subscription to Netflix or Spotify, or money spent on socialising, kids’ clubs, or family outings.
Once all the cost areas have been identified and labelled as essential or discretionary, the next question is could you get it cheaper if you shopped around? Car insurance or pet insurance, or broadband costs are examples of things that often you can reduce the annual cost by shopping around, and potentially changing provider each year. It is startling, sometimes, how much can be saved by doing this and there are services available to help you make comparisons such as Uswitch or Utility Warehouse, as well as many others to compare providers or consolidate services at discounted rates.
In the Legal and General study mentioned above, the findings stated that 25% of UK homes are not yet feeling the pinch due to an increased cost of living, cutting back on both essentials (69%) and luxuries (81%) is becoming a normal occurrence for most, and the majority are beginning to pair back their expenditure on essentials. *2
Another key area for consideration is changing your habits as a way of curbing spending. Are you the type of person to make yourself a coffee or tea in the morning and take it with you to work in a thermos mug or flask, or buy said item from a coffee shop on your route to work? Would you buy your lunch or make it at home and take it with you? Would a new found passion for cooking your favourite takeaway mean rather than ordering it in you help reduce your outgoings? For some they may not do any of these things already, but it is surprising how the cost of these things stacks up over a month. Another idea is to not just change a habit but give up your habit altogether. If you drink at home, or smoke, then its worth questioning what the cost of these are. Whether changing, or giving up, these habits are most definitely discretionary spends, and must be questioned as to their importance over buying the fundamental foods you need and providing a roof over your head, or keeping warm throughout the winter.
And whilst heating is mentioned, is it better to have the heating on constantly with a pre set temperature so it only comes on as its needed, or to only have the heating on for a period of time, day, or night, and then keep that heat locked in by closing windows and doors. This will differ for each of us depending on the type of property we live in, when we are at home and what we are doing, whether we have family or not for example.
A major area of expenditure is debt for many people, and that could include mortgages, overdrafts, loans, credit cards, car leasing to name a few. The cost of debt is and will continue to increase as interest rates rise. As the Bank of England uses interest rates as a way of trying to control inflation, they will continue to increase to levels higher than we have seen in the UK for some time, putting greater pressure on peoples monthly budgeting. Where people have fixed rates of interest on mortgages, or on personal loans, they may not feel the effect, but where the costs are variable, or increase with the level of debt, then this will bite harder and harder each month.
The current flux in the mortgage markets does not help the situation, but anyone who has a variable rate mortgage, or has a fixed rate deal that is ending soon, or possibly within the next year, should seek advice on what course of action is available to them to fix the rate of interest and secure the cost level for a period of time. This will help stabilise the cost.
Alternatively, consolidation of debts into one with a manageable payment profile and again a fixed rate of interest could be worth considering, and that could mean consolidating credit and store cards, with a 0% rate for a period of time. This is an area that needs thought and care, and it is strongly urged that guidance is sought from the provider before taking action.
We all use electronic devices, and in the modern world our homes are littered with smart devices, televisions and white goods. It is quite common these days to control lights etc through Alexa and things like this make life simpler, but that simplicity costs.
We leave devices switched on, in standby mode, meaning they continue to use energy, electricity, and whilst we may not think it is much, it all adds up. At home, we are as guilty of this as anyone else is, but physically turning some devices off at night will help reduce costs. For some households, you may have an energy provider that has different cost rates for day and night usage, so using the dishwasher at night or doing a load in the tumble dryer once you have gone to bed, may benefit from a lower cost of electric. LED bulbs rather than halogen bulbs is also another way of helping to cut your usage.
BOGOF, no I am not being rude, but bulk buying can be a way on those items you use regularly, of reducing the average cost of things. This could stretch as far as buying in bulk across family groups, with neighbours or work colleagues, and sharing the cost on certain items. I typically shop around for things too, specifically when buying gifts, to ensure I am getting the cheapest or best price possible. Our go to online stockists are not always the cheapest, even though they may offer the best delivery service. With Christmas fast approaching, it is a great time to put this into practice.
According to the Office of National Statistics (ONS) around 9 in 10 (91%) *1 adults reported their cost of living had increased compared with a year ago, while a lower percentage (73%) *1 reported an increase in their cost of living over the last month. In response to this, around 1 in 5 (19%) *1 working adults reported looking for a job that pays more money, including a promotion and among working adults, 15%*1 reported working more hours than usual in their main job because of increases in their cost of living, and 4% reported working more than one job.
What we can surmise from this is that the cost-of-living crisis is not going away any time soon, and we are all having to face up to the realities of what it means for us. Some people will struggle more than others, and there are some packages of support available from the government. No matter what your circumstances, there are things we can all do to help our own personal cause, as I have hopefully highlighted in this article. We all hope for a mild winter and for a level of normality, whatever that may be these days.
Paul Swales is a Financial Adviser with Gregory Wealth Management LLP.
To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Paul Swales on +447789877589 or email Paul.Swales@sjpp.co.uk.
*1 Public opinions and social trends, Great Britain - Office for National Statistics based on the latest period between 14 and 25 September 2022, based on adults in Great Britain.
*2 Legal & General Breadline to Deadline Report 2022 Press Release –