Adapting Financial Planning to Combat Inflation

By Rachel Springall

Personal Finance Expert, Moneyfacts

The impact of inflation on the true buying power of savers’ cash is evident. Due to a low-interest-rate environment, there are no standard savings accounts that can outpace the Government’s target of 2%. This means that the longer-term impact could be damaging if not taken seriously. Those borrowing can also be affected and finding the right balance between savings and paying off debts can be challenging.

Cash savings rates fell to record lows this year and only in recent months have we started to see small signs of stabilisation; recovery is happening at a slow and steady pace. With inflation only expected to continue to rise, and interest rates not likely to increase sharply at any time soon, it’s important to consider how you can best protect yourself and your savings from inflation’s eroding power. 

Budgeting and creating realistic goals for retirement

For many, finding a comfortable balance between saving for retirement and managing any debts can seem taxing – especially in the face of rising inflation. One of the best places to start evaluating whether you are facing a pensions savings shortfall would be to scrutinise your monthly expenses along with any savings or debt. 

Whilst pension planning after the age of 50 can feel daunting, it’s important to work out any retirement income as the first port of call. The YourPension government website can calculate retirement income in just a few minutes by answering some simple questions. Using online calculators can help you to realistically plan how to make up for any shortfall. Alternatives to traditional pensions or savings accounts could be to invest in antiques, wine, shares, gold or even property through buy-to-let, but all areas can come with risk so seeking an expert or advisor is essential before investing.

Seeking higher growth potential in stocks and shares ISAs

While online savings accounts from some challenger brands are offering attractive rates even in the current low-interest-rate environment, savers may want to consider higher-risk stocks and shares. Investing cash into a stocks and shares ISA requires an understanding of fund management charges and performance. The growth potential may well persuade some to consider this option, but it’s worth remembering that past performance is no guarantee of the future and there is a risk involved. If you’re concerned or unsure about the funds on offer, seek advice and have a risk portfolio assessment before taking any action. Whatever you decide to do, with cash savings or stocks and shares, typically saving little and often and over the longer term is a reasonable goal to give the pot time to grow.

Taking advantage of lower borrowing rates and assessing any retirement shortfall

Consumers may well be concerned about a retirement income shortfall as inflation rises, especially if you are still paying off a mortgage, credit card or loan and lack substantial savings on the side. If interest rates were to rise this could increase the overall cost of the debt. Switching deals during a fixed term or indeed away from a standard variable rate may save a borrower a significant sum. However, seeking advice and doing your research is vital before committing to any arrangement. 

Retirees with equity in their home

If you own your home and have a pensions shortfall, downsizing may be an option. However, depending on individual circumstances and overall wellbeing and health, moving home could be too much of an upheaval. For this group, equity release may be an alternative as it unlocks wealth out of property. Consider these plans only with the help of an independent financial advisor. Due to the impact on inheritance planning and the various options available; it’s not as simple as comparing the interest rate alone.

Combating apathy and how to keep abreast of market changes

One of the easiest and quickest ways to compare savings rates is to check online. Signing up to rate alerts and newsletters is also a good idea to keep on top of changes in the market. Trust in a brand is important, but it is worth pointing out that challenger banks are offering much better rates than the familiar high-street bank brands. Just make sure that any brand is covered by the Financial Services Compensation Scheme (FSCS) prior to signing up.

Savers should get themselves into the habit of reviewing their savings account each quarter, particularly if they earn a variable interest rate to make the most of their savings. It’s also worthwhile to keep an eye out for any Bank of England base rate announcements, as any rise or fall can impact the rate they earn.

Whatever your circumstances, the main thing is to take some sort of action to help fight back against inflation. Switching financial products could help you avoid wasting cash unnecessarily on interest charges, being invested in poor-performing funds or receiving a poor interest rate on savings. It is never too late to take action, review finances and make plans to help improve your financial health.

Any views or opinions presented here do not necessarily represent those of Ford Money, FCE Bank plc or Ford Motor Company Group and its affiliates.