UK Inflation: How to Manage the Rising Cost of Living

UK households face more financial pressure as the cost of living rises at its fastest rate in almost 30 years.

Inflation rose 5.4% in the 12 months to December 2021, the sharpest one-year increase since March 1992, according to figures from the Office for National Statistics (ONS).

Inflation is a tool used to measure how much the price of goods and services rise each year. And a rise in the inflation rate means that the cost of everyday items such as groceries is going up.

Despite the cost of living rising dramatically, wages haven’t kept up with the pace. Salaries went up by just 0.4%, on average, from September to November last year.

With energy prices and national insurance set to rise from April, many households will have their finances stretched further. So if you’re worried about how the rising cost of living will affect your finances, you’re not alone.

Here, we give simple tips to help you manage the increase in living costs and how to get financial support.

Get a clear picture of your finances

Reviewing your finances and setting a budget are crucial steps for dealing with a rise in the cost of living. They give you a clear picture of your finances and help you understand how much money you have to work with each month.

Get hold of at least three months’ worth of bank statements and make a note of the following:

Income: Wages, bonuses, pension or benefits you receive.
Essential spending: Mortgage or rent payments, bills, travel expenses, food and childcare costs.
Non-essential spending: Socialising, holidays, hobbies and leisure activities.
Debt: Repayments for money owed through loans, credit cards and overdrafts.
Savings and investments: Money set aside into a savings account, ISA or investment portfolio.

Once you have a clear idea of your income and how much you’re spending, you can make a budget to help cut costs.

Ideally, your budget should follow the 50/30/20 rule. That means 50% of your income should go towards essential spending, 30% on non-essentials and 20% on savings or paying off debt.

But, everyone’s financial situation is different, so don’t panic if yours doesn’t fit the rule exactly. It’s a helpful benchmark, which can help you tweak your budget to cut spending and manage rising living costs.

Save on household bills and essential spending

The majority of our income goes towards essential spending, which includes mortgage or rent payments, bills, travel, food and childcare.

So it can feel daunting when inflation rises and these everyday costs become more expensive. However, there are ways to make a saving and ensure you get the best deal possible to help manage the rising cost of living.

Energy bills

The combination of rising energy prices and energy providers going bust can make it feel as though there isn’t much choice available. But using an energy price comparison website can help you check if you’re on the best energy deal. If you can save money with another supplier, then it’s worth switching.

If you’re already with the cheapest provider, the general rule of thumb is to make sure you’re on a fixed-rate deal rather than the provider’s standard variable rate (SVR) tariff. SVR tariffs tend to be more expensive than fixed-rate deals and can go up or down each month.

However, at the time of writing, with energy prices currently at an all-time high, you’re unlikely to find a fixed-rate deal that is cheaper than the energy price cap. So it may be worth sticking to the variable rate for the time being but keeping an eye on new deals, which may offer a cheaper tariff.

If you’re struggling to afford your energy payments, contact your supplier as soon as possible. It may be able to offer financial support or an alternative payment plan. It’s also worth checking whether you’re eligible for a grant to help with your gas and electricity bills.

» MORE: 42 ways to save energy at home

Grocery shopping

Supermarket food prices have increased considerably but there are simple hacks to cut down your grocery bill.

Planning your meals in advance and making a list before heading to the supermarket can help avoid overspending. Switching to cheaper brands can help you save money at the checkout.

Being tactical about where you shop can help too. Online price comparison websites such as Trolley and My Supermarket Compare can help you compare the cost of items at different stores to find the cheapest deal.

Keeping an eye out for coupons online or in supermarket magazines can also help you save money on your grocery shopping too.

Fuel

Wholesale energy prices are at an all-time high which has had a knock-on effect for petrol and diesel.

Planning your refills in advance could help cut your petrol bill. There are online platforms that compare petrol and diesel prices in your local area to help you find the cheapest forecourt.

Making your car more fuel-efficient can also help you reduce how often you need to fill up with petrol. If possible, cut down on your non-essential car trips, sharing lifts for the school run or the commute to work.

Travel costs

A Railcard or Coachcard could help you save up to a third on train or coach tickets if you’re eligible.

Booking your tickets early and travelling at off-peak times, where possible, may give you access to cheaper seats too.

It may work out cheaper to split your journey into two singles rather than buying a return. So it’s worth comparing prices to see if you can save on your journey. Websites such as Split My Fare and TrainSplitting show how much you can save by splitting your journey.

Childcare costs

Cutting childcare costs can be tricky due to the availability of providers in your area. However, the government offers several schemes that could help eligible households including:

Tax-free childcare:Up to £500 every three months for each child (up to £2,000 a year) or up to £1,000 (up to £4,000 a year) for a child with disabilities.
15 to 30 hours of free childcare:Available to all three- to four-year-olds in England, Wales and Scotland. (Northern Ireland offers financial support to eligible households to pay for childcare from approved providers.)
Childcare vouchers:You can use your pre-tax salary to pay for childcare if you’re already signed up, but the scheme was closed to new applicants in October 2018.

If you receive working tax credit or universal credit, you may be able to claim additional childcare support from the government if you qualify.

There are strict eligibility criteria for government support and you can find out if you qualify on Gov.uk. You can also call the Department for Education’s helpline on 0370 000 2288 if anything is unclear.

» MORE: How to get a child benefit loan

Can you boost your income?

If your finances are still stretched after making cutbacks on spending, try to find opportunities to increase your income. For example, you may qualify for government support such as universal credit or child benefits. If you’re employed it’s worth asking whether you’re eligible for a pay rise or promotion, which could help give your salary an uplift.

Getting creative and taking on a side hustle or selling preloved items, such as clothes and gadgets, online could help boost your income too.

» MORE: 27 ways to make money online and offline

Speak to your lender

A rise in the cost of living could make it harder to keep up with credit repayments such as loans, mortgages or credit cards.

If you don’t think you’ll be able to afford a payment, speak to your lender as it may be able to offer support.

Sue Anderson, head of media at StepChange, says: “If you’re struggling with your bills, you don’t have to go through it alone. Many creditors and energy companies offer support to households experiencing financial distress, so be sure to discuss your situation with your provider to find out what help they can offer.”

Missing repayments can have a negative impact on your credit score, which can make borrowing more difficult. So it’s important to get help with outstanding repayments as soon as possible.

James Jones, head of consumer affairs at credit agency Experian, says: “A missed payment can affect your credit score – and may even reduce your chances of getting credit in the future. If you’re struggling to meet your regular payments and your circumstances are, realistically, unlikely to improve in the near future then you’re probably better off contacting one of the free money advice providers, such as National Debtline, StepChange or Citizens Advice. They’re well placed to offer confidential, impartial advice on getting your finances back on track.”

Switch your savings

Building up a savings pot can help cover costs when the cost of living increases. But a high inflation rate can negatively impact your savings over time because the money in your account generally won’t go as far. Being strategic with your savings, however, could help your money work harder.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown says: “The first priority is an emergency savings safety net of three to six months’ worth of essential expenses. The only sensible place to keep this cash is in an easy-access account.”

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How to Manage the Rising Cost of Living

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Get a clear picture of your finances