Rising inflation, including increased bills and energy costs, coupled with interest rate rises, are all putting pressure on household finances. Those with investments may also be concerned about potential volatility in the market.
WEALTH at work, a leading financial wellbeing and retirement specialist, has collated a list of things that employees should consider to look after their money in a crisis.
Checklist for employees to protect their money in a crisis
1. Have a diversified portfolio
For employees who have investments, it is important in uncertain times that they spread their risk. It is much safer to have a diversified portfolio rather than someone having all their money in property, or a specific company which could make them vulnerable.
2. Minimise the impact of inflation
Inflation refers to the price increases of the goods and services individuals spend their money on. If the return on cash savings doesn’t keep up with price rises, the real value of savings will reduce over time. Whilst rising interest rates can be good for savers, the increases offered on savings accounts are usually significantly less than inflation, so over time the value of an individual’s savings, or what they are able to buy with them can fall.
If employees are saving for the long term, and are prepared to take some risk with their savings, they could consider investing their money. Over the long term, equity investments have often exceeded inflation, meaning investors have received a real return on their money. However, employees should be aware that past performance of investments is not a guide to the future, meaning there is always the risk of receiving less than their original investment.
If they would prefer not to take any risk with their money, employees should search for the best interest rate deal on their savings. Interest rates remain low, however banks and building societies have begun increasing rates on some accounts as the Bank of England base rate has increased.
3. Be aware of interest rate rises on borrowing
Often when inflation rises, interest rates are increased to try to curb inflation. The main thing an employee will notice is that the cost of borrowing increases, so mortgages and other debt may become more expensive. If they are not on a fixed rate mortgage currently, moving to a fixed rate now will give them the security of knowing their repayment won’t change during their fixed rate term.
4. Manage a budget
It’s always a good idea for an employee to be aware of their monthly budget and to make sure they’re not spending more than they have coming in. They should start by working out exactly what their income is, and what financial commitments they have e.g. mortgage, debt, childcare, insurance and utility bills, and review their outgoings. If the amount of money they need each month is more than the amount they have coming in, they can then work out what action to take to cover their costs.
When looking at how much prices are going up, average inflation rates are only an approximate guide. Importantly, employees should review their personal experience of inflation. For example, the recent increase to the ‘energy price cap’ means those not on a fixed rate tariff have typically seen their energy bill increase by £693 from £1,277 to £1,971 per year (difference due to rounding). Based on this, if we take someone who could previously afford to save £100 of their salary each month, they may now only be able to put aside £42.25 each month due to energy cost increases alone. Factoring in other price increases, such as those to food, clothing and council tax could result in a significant strain on household finances.
5. Try to pay off any bad debt
It’s important for an employee to review and understand the different type of debt that they may have. For example, they may consider their mortgage to be a form of ‘good debt’. This could be true if they are regularly reviewing their mortgage deal, are meeting the monthly repayments and are comfortable with when their mortgage will be cleared. At the opposite end of the spectrum, debt with high interest payments such as payday loans and credit cards can get out of control if they are not repaid quickly. It should always be a priority to pay off expensive debt first. For example, according to MoneyHelper if someone was to borrow £2,000 on a 19% APR and only pays the minimum payment every month, it would take them 24 years and 2 months to repay it and they would pay back £4,731 in total. The total interest they would have to repay would be a shocking £2,731!
6. Start an emergency fund
Ideally, employees should have 3-6 months of savings that can be accessed at short notice should they or another member of their household lose their job, become ill, or for any unforeseen expense. It’s good to get into the savings habit as soon as possible, by putting away small, regular amounts of money. This can be more effective than trying to save larger amounts of money because it means they’re not overcommitting. It will ensure they budget their spending more effectively.
7. Watch out for investment scams
Fraudsters can often prey on people during uncertain times and when they may be more vulnerable; often promising high value and speedy returns on their investment. It was recently reported that the Financial Conduct Authority (FCA) received 16,000 enquiries about possible scams between April and September 2021, a 30% increase on the same period in 2020. In particular, crypto investment fraud rose by 64% between 2020 and 2021. Before making any investments, individuals should check that the company is registered with the FCA, as if they’re not, it’s probably a scam. If someone thinks that they are being scammed, they must report it on the FCA’s Scam Smart website and to Action Fraud. Not only may they be able to help them, but they will be able to help others from falling for the same scam.
Jonathan Watts-Lay, Director, WEALTH at work, comments;
“Many employees don’t recognise how vulnerable their finances are until something happens. Hopefully the list we have outlined will help them to understand the impact of rising inflation and interest rates, and how to look after their money in a crisis.”
He continues, “Many employers now offer their workforce financial wellbeing support including financial education workshops, one-to-one guidance or coaching and digital tools and helplines, to help them understand the key financial issues affecting them. Topics can cover a range of financial matters such as debt and money management, scam warning signs, managing savings, retirement and health and financial protection. This can really help employees to build their financial resilience now and for the future, so that they are better equipped to withstand any financial shocks.”