Managing your finances when interest rates and inflation increase

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With interest rates rising and the cost of living increasing, understanding your financial position, savings, debts and investments, alongside your regular income and outgoings is important. Whilst every individual’s circumstances are unique, here we’ve put together a few areas you might wish to consider or be considering when looking at financial planning during this tumultuous time. 

Budget Planning

Having a handle on your income and outgoings is the first step in understanding where you might want to make changes and/or how fluctuations in interest rates and inflation might have an impact. Using a budget planner can help provide an overview. 

How much emergency fund is enough?

Building a decent savings pot can underpin greater financial resilience, but how much should you look to keep aside? Ideally, you need to think beyond a one-off large bill and look to cover at least three or potentially up to six months of essential bills. This should provide some headroom in case of redundancy or sudden illness. You might also wish to consider income protection. Of course, the decision is a personal one and what you feel comfortable with.

I have investments, should I cash them in? 

From time to time, stock markets go through periods of uncertainty. We had one during the COVID pandemic and are experiencing one now. Market falls are understandably unsettling for investors and you might be tempted to change your long-term plan by selling your investments. However, stock market volatility does tend to be short-lived. Timing the stock market is extremely difficult and the best policy is usually to stay fully invested over the long term according to your time horizon. 

Is now the right time to invest?

Bank and building society accounts are the ideal place for your savings and emergency money as they are easily accessible and tend to be the safest place to put your money, but doing so exposes your capital to the enemy of the investor – inflation. Interest rates are now higher and you can now access better savings rates. However, inflation is running a lot higher which means your money is not keeping up with it.

Don’t forget the Personal Savings Allowance (PSA)

Since the Personal Savings Allowance was introduced in 2016, rates have been so low that you have probably been unlikely to pay income tax on your savings. Most people can earn some interest from their savings without paying tax. However, with interest rates increasing you might be in a situation where you are caught, especially if your income has risen and you have moved into a higher tax bracket. There are other tax efficient options such as National Savings and ISA’s to consider as alternatives to shelter your cash but it all depends on your income tax position.

Review Large Cash Holdings

With inflation currently at 8.6%, even with savings rates going up, the value of your money is reducing. You could have income tax to pay on your savings while it doesn’t keep pace with inflation, creating a “double whammy effect”. Now might be a good time to review those cash holdings for those people willing to consider a medium to long-term view.
For those holding large amounts in cash ISA’s, with the impact of inflation on returns, now may also be a good time to review these.

Don't go it alone when investing

Now is not the time to try and go it alone – even if you think you have the right knowledge and experience. Regrettably, we have seen many instances where self-select investing, which whilst on the face of it may initially save costs, has been an expensive experiment. No one can predict the peaks and troughs of financial markets and it is extraordinarily difficult to time when the best days (peaks) are. Timing the stock market is extremely challenging, the best policy is usually to stay fully invested over the long term. You can read Our Guide to Investing here. 

Support throughout these challenging times

To help understand what is driving the uncertainty in economies and markets you can view our weekly Investment Market Updates from our Fund Manager, Richard Cole – Future Money Asset Management. In addition, we are running throughout 2022 ‘Making Sense of Markets’ webinars where you can watch our experts explain how your investment and pension portfolios are being affected. Click here to register.

Our Chartered Independent Financial Advisers can discuss and advise on all aspects of financial planning, including retirement, investment and inheritance tax planning. Our advice is personalised based on individual circumstances. As all our expertise is “under one roof” this allows our Financial Planning Consultants to also work alongside our tax advisers to ensure the right overall advice and support is provided.