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.