Households face cost of living crisis with rising inflation and energy prices – how to protect your finances

THE Bank of England may have held off from hiking interest rates this month but households are still facing a cost of living squeeze.

Energy prices continue to soar and other household bills are expected to increase as inflation is predicted to hit 5% by next April.

Inflation – the measure of the cost of living such as your food, travel, clothes and energy bills – has been rising in recent months.

It is currently at 3.1%, which is above the Bank of England's target of 2%.

The energy supply crisis is one of the main factors pushing up household bills.

Small suppliers have collapsed as wholesale gas prices hit record highs, leaving customers with higher bills and less choice.

The supply chain shortage due to a spike in demand and lack of delivery drivers is also pushing up prices for goods such as toys and food.

One measure the Bank of England can use to stem inflation is raising interest rates.

This is the cost of borrowing and the idea is that if consumers have to spend more on their loans and credit cards, they will be more prudent and spend less elsewhere, which should force shops to bring their prices down.

Interest rates are currently at record lows of 0.1% and the Bank of England's monetary policy committee was rumoured to be considering pushing rates up for the first time since 2018 this month.

But it held off and voted 7 to 2 to hold rates.

The Bank of England did, however, warn that inflation could hit 5% by next April and said interest rates were likely to reach "around 1% by the end of 2022".

Bank of England governor Andrew Bailey said he was "very sorry" that households are being hit by rising prices.

He told the BBC: "Inflation is clearly something that bites on people's household income. I'm sure they're already feeling that in terms of prices that are going up."

Mr Bailey said the Bank of England wanted to monitor what would happen with global and domestic supply issuesbefore raising rates but a hike at December's meeting hasn't been ruled out.

Prices are already rising, regardless of the actions of the Bank of England, with energy bills rocketing and some of the best mortgage rates being pulled form the market.

Here is what you can do to protect your finances.

Energy Bills

Gas and electricity prices are going up.

This is because of rising wholesale gas prices, which has led to the collapse of 21 suppliers this year.

Additionally, the energy price cap rose to £1,277 in October, adding an average of £139 to household bills. As wholesale gas prices continue to rise, it’s predicted that bills will go up even further next year.

The standard advice is to shop around for the best fixed deal but suppliers have been pulling top tariffs to cope with soaring costs.

Experts such as Energy Helpline have warned that most fixed rate tariffs are still more expensive than sticking with a variable deal with the price cap so you may be better off waiting.

Phone, broadband and insurance

It is still possible to shop around and make savings on other household bills.

You can use a comparison website to search for better pricing on car, phones, broadband, TV and insurance when your deal is up for renewal.

For example, Compare The Market claims users can save £267.92 when switching car insurance through its comparison website and £110 when shopping around for home cover.

Many people have signed up to new services like Spotify, Netflix or Sky over the pandemic as they were spending more time at home.

Now could be a good time to consider whether you’re using all of these subscriptions and if you’re getting a decent deal for them. 

Research by TopCashback found that on average we’re shelling out £105 a year on subscriptions we don’t use or think are good value. 

Supermarket shopping

Industry experts and government ministers have warned that food prices could go up due to supply chain issues and driver shortages, meaning many stores are having problems keeping their shelves stocked. 

You could reduce your grocery bill by shopping for own brand products and avoid being enticed by offers for things you don’t really need. 

Supermarket loyalty schemes such as Tesco Clubcard can help you make some savings. 

How to get cashback every time you shop

NOT using a cashback site or app means you are missing out every time you shop. Here are full-time bargain hunter Collette Jones’ best tips.

  • Check out welcome offers: Cashback sites have amazing freebies for new customers, such as a takeaway from Just Eat or a Benefit beauty product
  • Look for cashback on everything: You can claim on things such as MOTs, insurance, train tickets and holidays
  • Save money at the supermarket: It’s a good idea to download apps Shopmium, Check-outSmart, Quidco ClickSnap, GreenJinn and TopCashback’s Snap and Save. Check out what is available, pick it up in-store and upload a photo of the receipt to get your cashback
  • Combine cashback offers with promotions: Double savings and maximise cashback by matching third-party offers from cashback sites with in-store and online promotions. You can’t always use discount codes with cashback, but you can take advantage of sales and offers such as free gifts
  • Download cashback notifiers: The website Honey has a great notifier. It sits in your browser, pops up when you click on a website that offers cashback and searches voucher codes

Sainsbury’s has also revamped its Nectar card scheme, and estimates a new personalised reward system could save shoppers up to £200 a year on products they already buy. 

If you’re worried about the cost of your shopping, you can also get help from your local food bank. Websites such as the Trussell Trust can help you locate a food bank near you.

Parents may also be able to get free school meals for their children. 

Banking and savings

Inflation rising isn’t just a problem for your bills and food shop. 

As inflation rises, it erodes the spending power of your hard-earned cash.

That means if you have £100 in the bank and inflation is 3%, in a year’s time, the purchasing power of your money will have fallen to £97. 

So it’s important to make sure your money is working hard for you.

But it's almost impossible to find a savings account to beat inflation at the moment.

According to MoneySavingExpert, the best easy-access accounts pay just 0.66% currently and you’ll get 1.35% if you tie your money up for a year. 

If you save £100, that means you’ll earn interest of just 66p and £1.35 respectively over a year. 

Look for banks offering switching incentives to move your current account.

Some banks are offering you cash if you switch your current account. Currently, RBS pays up to £150, Santander £130 and Nationwide £125. 

Consider credit cards that offer cashback.

American Express’s Platinum Cashback Everyday credit card pays 5% cashback on your purchases for the first three months.

There’s no fee for having the card but it is a credit card, so you should be prepared to pay off your balance in full every month to avoid racking up costly interest charges. 

Additionally, Santander’s 123 Lite account is another option for cashback fans.

It charges £2 a month, but you get cashback of up to 3% on the bills you pay from the account. 

Mortgages 

The record low interest rates have been good for mortgage borrowers.

It has meant that mortgage rates have also plummeted to record lows, making it cheaper to get on the property ladder if you have a large enough deposit.  

Buyers can lock in to a mortgage rate below 1% at the moment. 

But there are warnings that some of the top mortgage rates are already disappearing so you need to act fast if you want one.

If you are remortgaging, make sure you shop around and don’t just assume your current provider can offer you the best deal. 

When your deal ends you’ll be put on the standard variable tariff, which is typically far more expensive than the best fixed-rate or tracker mortgage deals.

Borrowers on tracker remortgages may also want to take action sooner as a rate rise would push up their monthly mortgage repayments.

Pensions

All workers over the age of 22 and earning more than £10,000 are automatically-enrolled into workplace pension schemes.

It may be tempting to stop making contributions if you are struggling with your bills so you can access some extra cash.

This is risky as millions of people are already facing an income shortfall in retirement because they are not saving enough.

If you do need some breathing space however, you can arrange a pension contribution holiday. 

Workers are entitled to leave their pension scheme at any time, and can do this by contacting the pension provider and opting out.

While it's best to make this break as short as possible, if you do forget to opt back in auto-enrolment rules mean you'll be automatically put back into the pension scheme after three years or if you move to a different employer.

Working from home 

The pandemic has shifted the way we work, with many people now logging in from home rather than going to the office.

Consider your heating and electricity use when spending more time at home as this could push up your energy bills, especially for all those cups of tea.

Make sure you do these four things before you turn the heating on. Bleeding the radiators and turning the thermostat down can save you money. 

If you’re on a low income or receiving benefits, you could be eligible for the warm home discount, which gets you £140 off your bills during the winter months.

The cold weather payment is a £25 grant for people on certain benefits when the temperature drops below zero for seven days.  

But simple steps like turning down the heating can help too. Every degree you dial down the thermostat saves you around £60 a year, according to GoCompare.

Meanwhile, draught-proofing could knock another £20 a year off your bills. 

Don’t be tempted to leave your TV on standby or your phone and laptop plugged in when they’re fully charged if you’re at home all day. Doing so could add £35 to your energy bill. 

You may also be able to get tax relief if you are working from home regularly.

Since April 6, 2020 workers can claim a tax relief of £6 if they’re at home without having to provide evidence of their costs. 

Alternatively, you can work out the exact amount of costs you’ve incurred, for example by working out how many of the calls you made on your phone were business related.

But you’ll have to provide evidence such as receipts, bills and contracts.

You can check if you can claim through the Government website.

Tax relief works by reducing the amount of tax you pay, so you don’t get this money back directly.

Instead, if you claim the £6 a week relief and you’re a basic rate taxpayer who usually pays 20% tax, your tax bill is reduced by £1.20 a week. 

 

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