Rising inflation, soaring fuel bills, and Russia’s invasion of Ukraine have led to stock market uncertainty and tightened purse strings for many. With tax rises on the horizon and threshold freezes still in place, it is only natural to be concerned about the resilience of your finances.
A long-term plan, aligned to your goals, should be able to withstand short-term shocks. That said, the current UK cost of living crisis means that now is the perfect time to revisit your household budget, your pension and investments, and your life goals.
Here are some important questions you might want to ask your HA&W planner now.
1. What does rising inflation mean for me?
Why is inflation rising?
The current rise in inflation began back in May 2021, as the UK emerged from coronavirus lockdown. Having doubled between March and April, by May the Consumer Price Index (CPI) exceeded the Bank of England’s (BoE’s) 2% target. It stands at 6.2% for February 2022, already its highest level for 30 years.
In a statement of 17 March 2022, the BoE confirmed that it now expects inflation to peak at around 10% in the spring. CPI might not return to its 2% target until 2024.
Rising inflation increases your day-to-day expenditure through increased prices on the goods you buy. Pent-up demand for spending during the pandemic was exacerbated by a global supply chain crisis. Economic sanctions imposed on Russia following their invasion of Ukraine has increased uncertainty.
Managing your cash savings
You might find you need to revisit your household budget. With fuel and energy bills rising, filling your car and heating your home is set to become a lot more expensive. Tracking your income and outgoings should help you to keep your finances on track.
Also, be sure to check-in with your emergency fund. We recommend between three and six months of household expenditure held in cash (to be easily accessible), but be sure you don’t hold too much.
During periods of high inflation (and with bank interest rates comparatively low) the money you hold in cash probably won’t be keeping pace with inflation and so is losing value in real terms.
Keep track of your pension withdrawals too
If you are retired, you might be struggling to manage your pension withdrawals.
Drawing down only what you need is key. If you take out too much, it will likely sit in your high street bank savings account and suffer the same fate as your excess emergency fund.
2. How do rising interest rates affect my finances?
The BoE recently voted to increase the base rate for the third time in three consecutive meetings, from 0.5% to 0.75%. This is partly in response to the war in Ukraine and uplifted forecasts for inflation.
The rise sees interest rates return to pre-pandemic levels. While a rising base rate is good news for savers, after more than a decade of low interest rates following the 2008 global financial crisis – and with inflation rising – your cash savings are still at risk of losing real-terms value.
You might also find that there is a delay in your high street bank passing on the rate rise, if they opt to pass it on at all.
3. How will Russia’s invasion of Ukraine affect the markets?
World stock markets generally fear uncertainty. In recent years, everything from the war in Iraq to the Brexit referendum and the coronavirus pandemic has created uncertainty and seen short-term drops in the market.
Russia’s decision to invade Ukraine has caused shock and led to condemnation across the globe. It has also led to short-term market volatility.
When prices fall, it is important to remember that short-term dips are to be expected. They’ve happened before and they will happen again. If your long-term investment goal hasn’t changed though, it is unlikely that your plan will need to.
In our recent blog, 3 tips to manage your concern in an uncertain time, we recommended the following:
- Try not to panic
- Don’t check the value of your portfolio every day
- Focus on your long-term goals.
Patience, focus, and the ability to avoid emotional knee-jerk reactions is key to keeping your long-term financial plans on track.
At HA&W, we have decades of combined experience and can provide you with the advice, confidence, and reassurance you need.
Get in touch
If you have any concerns about the cost of living crisis, rising inflation, or the effect of war in Ukraine on your investments, please contact us to find out how our Chartered financial planners could help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
