As the cost of living continues to rise, millions of UK households will see their finances squeezed this winter.
iNews recently reported that nearly half (46%) of UK households with children at home – around 3.8 million families – are struggling to pay their bills.
If you are financially supporting loved ones currently, that will only get more difficult.
In fact, a recent report has found that 48% of those giving financial support to family members will struggle to do so over the next 12 months.
You might find that you need to lower the support you are giving, but this could, in turn, increase the financial difficulties your loved ones face.
Here are some important lessons that you can teach your children and grandchildren to help them to stay debt-free as the cost of living crisis continues.
1. Communication is key
As part of last year’s Talk Money Week (8 to 12 November 2021), the Money and Pension Service reported that 90% of UK adults – amounting to around 47 million people – find it difficult to talk about money.
Acknowledging money difficulties can be hard but these issues must be talked through.
On a practical level, not speaking to a loan provider means that they won’t know there’s a problem. If your loved ones make their situation clear, a creditor might be able to help arrange a payment plan or offer guidance on grants available.
There are emotional wellbeing benefits too. A recent report from Royal London found that 62% of couples have argued about their finances, making money the biggest cause of disagreements between partners.
Being open and honest with loved ones means that each party will always know where they stand and can work together to resolve any issues.
2. Revisit the household budget
The 50/30/20 strategy
There are plenty of different ways for your loved ones to approach their household budget. One simple way – known as the 50/30/20 method – involves splitting monthly outgoings into three categories: needs, wants, and savings.
Each month, 50% of household income goes on “needs”, 30% on “wants”, and 20% on “savings”.
Encouraging your loved ones to adopt this method could help them as times get tougher. They’ll be best off paying for bills and essentials first, and then setting 20% aside for their future selves through saving into a pension or investment. Only then should the 30% be used for “wants”.
Avoid “buy now, pay later” schemes
The recent rise of the buy now, pay later (BNPL) scheme Klarna, made clear the appetite for this option among UK consumers.
But opting for this type of payment is rarely, if ever, a good idea.
Hidden fees and interest can soon build up and it is much better to use the above method to take control of a budget, saving toward a need or a want.
If a loved one is currently in an overdraft, factoring getting out of the overdraft into the monthly budget is also key. This might mean cutting out non-essentials in the short term.
3. Try to build an emergency fund
While it might be hard for your loved ones to think about putting extra money aside in the current climate, careful budgeting could mean it is doable. Not only that, but the benefits could be far-reaching.
A rainy day fund – usually of between three to six months of household expenditure – can make all the difference when times are tough. It could be used to cover the unexpected cost of a rise in bills or replace income following a job loss.
Held in an easy access cash account, the fund will be readily available when your loved ones need it.
It is important to remember that six months of expenditure doesn’t need to be amassed and put aside immediately. But careful budgeting, cutting out excess expenditure and putting a small amount aside each month, will be enough to build a rainy day fund.
The final lesson to teach your loved ones is that it is possible to hold too much in an emergency fund. This is especially true during the current economic climate of low savings rates and high inflation.
Money held in cash is effectively losing value in real terms. It is important to ensure that the rainy day fund is enough, but not too much, and that it remains fit for purpose as the economic climate changes.
Get in touch
HA&W can help you and your loved ones to stay on track during the crisis, so get in touch. Contact us now 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.
