Personal Finances- lessons learnt- what we could or shouldn’t do in the current financial climate

Personal Finances- lessons learnt- what we could or shouldn’t do in the current financial climate
1st December 2022

Personal Finances- lessons learnt- what we could or shouldn’t do in the current financial climate

“Victory is always possible for the person who refuses to stop fighting.” ― Napoleon Hill

Personal finances are being pushed to breaking point because of the increased cost of living and inflation rate, which has increased throughout 2022. However, during the COVID-19 pandemic, households saved a substantial amount, reaching a record level of 23.9%. The significant increase in household savings corresponded with the government enforcing limitations on social interactions and financial activities, which resulted in more savings.

In contrast, in 2022, the saving rate has decreased as people’s ability to save has been impacted by higher living costs. The UK is feeling the sting because of living cost increases for food, energy, and other essentials. The economy being halted during the pandemic through numerous periods in 2020 and 2021 has contributed to some of the financial constraints that are being faced.

Furthermore, the money debt advice service conducted research that found that a quarter of adults in the UK had savings with a value of less than £100, which puts them at increased exposure to rising cost vulnerabilities.

In 2021, the number of UK households struggling with substantial debts rose by a third, before the winter increase in energy prices and the removal of the additional £20 in universal credit payments, according to research.

The Jubilee Debt Campaign analysed research conducted by the Bank of England and found that nearly 10% of households revealed that loan and interest repayments were a substantial burden, a 35% rise compared to a year before.

Households also stated that their typical monthly repayments amounted to a record £373 in 2021, an increase of 22% compared to the previous year and the most significant figure for at least a decade.

What should you do in the current financial climate?

  1. Set up a budget

    The first step of managing your finances is a budget; although it can be a little time- consuming, it is a worthwhile investment of your time so that you can get a better picture of your finances.

    Setting up a budget can decrease the likelihood of ending up in debt and increase the chances of being more prepared for unexpected expenses, improving the probability of a good credit score and being approved for a mortgage or loan. You will also be able to see where you can save money and be more likely to save for holidays and a mortgage on a home.

    What will be needed?

    Before starting a budget plan, you will need to calculate the amount you spend on household bills, other living costs, financial products such as insurance, bank charges or interest, and any money spent on family and friends such as lending money or purchase of gifts or travelling to events such as hen trips, forms of transport such as car expenses such as fuel tests, leisure, including gym membership, hobbies, cinema and other entertainment.

  2. Set money aside for savings

    Once you have set up your budget, make room for saving by setting up automatic direct transfers from your current account to your savings account every month. Even if you would like to save for a specific goal, it is still worth having an emergency saving pot, especially in the current financial climate where the cost of living is causing many people to be at their wit’s end.

  3. Download a Savings app

    Intellisaving is an innovative money-saving app that facilitates the integration of multiple savings and ISA accounts. The app is suitable for users’ journeys, such as starting a family, getting an education, and saving for a deposit on a property.

    The app is also home to several features which can be part of any user’s journey, such as a personal portfolio, a dashboard that navigates users to the other screens on the app, for instance, a watchlist screen which allows savers to refer back to accounts which have piqued their interest.

  4. Set up a free overdraft limit

    In 2020 regulations on overdraft fees changed. Therefore, the majority of banks had to amend their overdraft fees. Although you will not be penalised if you enter an unarranged overdraft with your bank, you will see charges that could reach a 39.9% effective annual rate (EAR) if you are overdrawn. Fear not, though, because some bank accounts have free authorised overdrafts of a limited amount.

  5. Cancel direct debits you don’t use

    Check your bank statements to see if there are any direct debits that you could cancel that you are not currently being used. Doing this could help you save a few extra pounds. Log into your online account at least once a month to keep an eye out on what is coming out. Or go to your nearest branch and ask if they could provide you with your bank statements.

What not to do in the current financial climate?

  1. Before becoming a co-signer, think about it carefully

    If you want to become a co-signer, it is crucial to consider the risks as this is a risky responsibility to account for if the borrower cannot make the repayments on a loan such as a mortgage, as you may have to step in and make the payments yourself.

    Furthermore, with the economy being so financially unstable, the risks are more significant as the borrower and the co-signer are more likely to have their finances strained. Co-signing will leave you liable throughout the duration of the loan.

    However, you may decide to go ahead and co-sign despite the risks and the current state of the economy; therefore, having a savings pot may be ideal as a safety net.

    Alternatively, other methods of helping family or friends could be considered, such as assisting with a down payment or making a personal payment.

  2. Think twice before acquiring new debt

    Acquiring new debt, such as a car loan or home equity line, in more stable financial conditions is acceptable; however, in more turbulent times, this can make a significant dent in financial pockets as you are more likely to lose a source of income or run out of money due to a more expensive cost of living.

    If you lose your job, you might have to find multiple positions that may not pay you as much as your previous job. Therefore, if you want to increase your debt load, consider that this will burden you more if your finances diminish.

  3. What if I embark on an Adjustable-Rate mortgage?

    If you are buying a home, you might want to take out an adjustable-rate mortgage; if interest rates are low, the monthly instalments would also be low.

    If the economy falls into recession, rates often decrease at the beginning of a recession and then increase when the economy shows signs of recovery.

    If the economy is unstable like it is at present, it is a good idea to think twice before embarking on any mortgage, as mortgage repayments will be challenging to pay back if your income declines for reasons such as losing your primary source of income.

  4. Avoid investing in risky investments

    It is best to be cautious before making a risky investment during unstable economic times, as if you invest in something that falls through, you stand to lose more than you put in initially, which in turbulent financial times can put further strain on your finances.

    The same goes for business owners hoping to make risky investments during early periods of a recession; it is not ideal for putting your neck on the line, but when the economy stabilises, considering investments becomes more feasible.

  5. Splurging out on significant expenses or lots of little expenses

    The temptation to overspend is something that remains even during unstable economic times; it can be tempting to spend on things that are not needed, especially if feeling stressed. But it is crucial to shift the focus elsewhere to other healthier habits, such as learning budget-friendly recipes or learning a new skill for free on YouTube.

The pandemic made many people realise how much they could save when they had no choice but to stop doing outdoor activities such as cinema and bowling due to the economy being paused during the peaks of the pandemic. However, as mentioned earlier, the level of saving has fallen since the economy opened back up after the lockdowns, primarily due to the cost- of-living crisis.

However, saving is still possible even in the current financial climate as there are ways of saving money; for instance, the number of excursions such as cinema or bowling can be reduced, and alternative methods of enjoyment can be sought instead, such as indoor movie night in, or an indoor games night. Money can also be saved on food expenses by following budget-friendly recipes, which can be found on YouTube and other sites.

Fuel costs can also be reduced by making fewer car journeys and fitting as many activities into one car journey. The money acquired through making these changes and other alterations to everyday life could make it easier to deposit money monthly.

Moreover, Intellisaving has several articles with recommendations on how to save money on a budget or on energy costs, such as 'Higher energy costs and how they are outing a strain on lower-income households’ and How to manage household on a budget?