Household budget

Are you ready? Household budgets

10 March 2022

2022 is well underway and the much-publicised cost crunch for many UK households seems to be appearing fast. With, it seems, all costs rising in the shops, at the pumps and in energy prices, purse strings are going to tighten fast. We have a Budget approaching towards the end of this month (23 March) and it will be interesting to see if the Chancellor has any help at hand.

Many people made resolutions at the start of a new year, although I gather that fewer see all of them through. Sometimes good intentions get dropped because they are just too difficult or time-consuming. With this in mind, if your resolutions have fallen by the wayside in what has been a somewhat troubled year so far, I wanted to suggest something simple and memorable for your money planning.

Remember one word – 'PILGRIMS' – and what each letter stands for. A pilgrim is defined as someone who journeys, say to a sacred place, or is regarded as journeying through life (or maybe through their money planning in this example).

P – Payslip

Check it every month to see what's being included and deducted. Make sure you understand it and that it is correct. Errors can be made.

I – Inflation rising

Inflation is rising, as no doubt you will have heard in the media, so build this into your budgeting over 2022. Energy & gas prices are rising particularly fast and showing no signs of stabilising at the moment. The current energy price cap ends at the end of March 2022, so be ready. Energy costs could take a significant chunk out of a household's budget when combined with limited pay increases and tax allowance freezes, and this will need to be incorporated into your money planning.

L – Lending

Two points here. Are you a borrower or a lender?

If you're a borrower, you need to be aware that interest rates are starting to creep up, with the Bank of England having raised the base rate from 0.1% to 0.25% in December 2021, and again to 0.50% in February 2022. It doesn't sound like much – however, further increases are expected, and these will have a knock-on effect on the cost of borrowing.

If you're a lender, you might be part of the 'Bank of Mum and Dad'. The property group Savills notes that parents supported 49% of first-time buyer purchases in 2021. Total contributions from parents helping younger generations to buy a house are expected to reach around £9.8 billion in 2021. We do expect this to continue, despite the stamp duty holiday having now ended.

G – Governance

How is your money invested? Do you know and do you care? More and more people are keen to ensure that their investments are invested for good, whatever that looks like to them, or at least to try and make sure that the companies they invest in aren't doing active harm to people or the environment.

ESG (Environmental, Social and Governance) investing is nothing new, although it has become a much-discussed topic in recent months and years. ESG investing places a layer of screening on funds to meet an investor's requirements, whatever their personal preference may be. The vast majority of pension and investment providers will offer a range of ethical and/or ESG focused funds (in fact, some providers are incorporating these views into their standard investment fund range).

R – Resilience

How financially resilient are you and your household? If you lost your job, or became ill, or the car needed replacing, do you have savings in place to cover this? Putting in place what we call an 'emergency deposit fund' is one of the cornerstones of financial planning, and we'd normally suggest around 3-6 months' income as a sensible goal. However, if you don't have any savings at the moment, anything you can put aside will help in the event of need.

I – Interest rates

As noted before, interest rates are starting to rise, and the cost of loans and mortgages is likely to increase over the coming year. If you're on a fixed rate mortgage, which most people are these days, this will be something to bear in mind when the fixed rate comes to an end. If you are on a variable rate mortgage, you may find costs starting to increase now, with the Bank of England having raised base rates in December and February. Equally, if you're looking at taking out a loan over 2022, you'll probably find that borrowing is more expensive than it has been in past years. Do make sure you budget for this and that you understand fully what you are really being charged. Shop around and take good advice where you can.

M – Managing your money

It's going to be a tough year for many people, with the Resolution Foundation think tank forecasting that a typical household's income will fall by about £1,000 over 2022 once the effect of inflation is taken into account (source: Resolution Foundation Living Standards Outlook 2022 / March 2022). There's never been a better time to get to grips with your money management – small changes could make all the difference when times are that bit harder.

S – Scams

Scammers are getting ever more sophisticated – don't let them steal your hard-earned cash. Text messages are a particularly effective trick at the moment, with malicious links included in an innocent-looking message about a parcel delivery or online purchase. Be cautious and don't click on anything you don't trust or recognise, including emails.

Stop and think: does this communication make sense?

Keep a careful eye on your money and finances as we approach the end of the tax year.

No individual advice is provided during the course of this blog.

Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899

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