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How to inflation-proof your finances

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Sort out your savings

With the rate of inflation at 3.1% in September, most people’s savings are effectively losing value. The rubbish interest rates on offer will not keep up with the rising cost of living but you should still make sure you are getting as good a return as possible. “Your emergency fund should be in a competitive easy access account paying as much interest as possible,” says Sarah Coles from the financial firm Hargreaves Lansdown. “For cash you won’t need for another six months or longer, it’s worth considering tying it up for the most suitable periods in a fixed-rate account.”

If you have £1,000 or more in savings, you could earn 0.6% with Aldermore’s Double Access account. It pays that rate if you make up to two withdrawals a year – any more and it will only pay 0.1%. Locking the same sum away for five years could get you a rate of 2%. Those are much better rates than the 0.01% you might be earning if you haven’t shopped around recently.

Invest some of your savings

View image in fullscreenWith the rate of inflation at 3.1% in September, most people’s savings are effectively losing value. Photograph: incamerastock/Alamy

For money beyond your emergency fund, you may want to consider the stock market, which offers the potential for inflation-beating returns. Of course, it also comes with the risk of losing your money. Funds will help you spread the risk better than individual shares.

Dzmitry Lipski, the head of funds research at Interactive Investor, says the Capital Gearing investment trust is one to consider. It has two objectives: to preserve the money you invest over any 12-month period and deliver returns in excess of inflation over the longer term.

“With a multi-asset portfolio of bonds, equities and property, and small holdings in infrastructure, gold and cash, this is a good every-weather option,” he says.

The Climate Assets Fund from the investment firm Quilter Cheviot is another fund that Lipski says could beat inflation – it invests in businesses working on environmental technologies.

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Trim any regular costs

If you are on a tight budget, any uptick in prices will put a further squeeze on your spending. Before you cut back, make sure you are getting the best deal on services you are paying for. Steve Webb, a partner at the financial consultancy LCP, suggests checking your phone contracts, home broadband and insurances. “There can’t be many people who couldn’t save in one of these areas,” he says. Energy would usually be on the list but for most people staying put is the best bet at the moment.

Webb says: “Go line by line through credit card statements and bank statements and make sure you know what every item is. You may well find ‘trial’ memberships that have suddenly become regularly monthly payments, etc that you never intended and could cut.”

Change what you buy

If your supermarket shop is costing more each week, see if you can easily switch any of the things you buy. “You might, for example, switch from fresh fruit and vegetables to frozen, canned pulses to dried ones or fresh pasta to dried,” Coles says. “You may also be able to trade down from brands to own-brands or budget ranges. There are plenty of ways to spend less in the supermarket, even when prices are rising.”

View image in fullscreenTo cut some costs, you could switch to supermarkets’ own-brand products. Photograph: Bloomberg/Getty Images

Fix your mortgage

The Bank of England keeps a close eye on inflation – it is tasked with making sure it stays at 2% and if it looks like it is out of control, it will act. When inflation is rising, that means it will consider increasing interest rates.

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Anyone on a variable-rate mortgage with no early repayment charge, or nearing the end of a fixed-rate deal, should consider grabbing one of the current ultra-low home loans on the market. For borrowers with at least 40% equity, it’s possible to lock in at below 1%. However, Coles predicts that the golden age for cheap mortgages is unlikely to last. “The markets are pricing in an interest rate rise before Christmas, and another one in early 2022. And the banks won’t wait for any rate rise before they start pushing up the cost of mortgages,” she says.

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If you have six months or less left on your current deal, you may be able to lock into a new one.

Ask for a pay rise

According to research published in the summer, employers are planning to give workers an average pay rise of 2.9% next year – that’s slightly lower than inflation has been over the past two months.

Unions are likely to use the inflation figures to argue for better pay for their members, and employers in shortage industries will already be considering higher wages to attract staff. But if you are at a smaller organisation you may need to ask.

View image in fullscreenIf you work at a smaller organisation you may need to ask for a raise to keep up with inflation. Photograph: Alamy

Coles suggests: “If your employer is currently recruiting, check the pay on offer, which could be a useful way of opening a conversation with your employer about a pay rise.”

Otherwise, look at comparable jobs with other employers – if these advertise higher wages, you may be able to use them as evidence that you should get more.

The Office for National Statistics has a calculator that will show you how much you would need for your earnings to keep up with inflation.

One element of the state pension triple lock has been ditched this year but the good news is that next year’s increase will still be linked to inflation, which means from April the basic state pension will go up by £4.25 a week and the new state pension will rise by £5.55.

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Annuities, which offer a payout in exchange for a lump sum of cash, are one way to provide yourself with an income

But when it comes to your other pension income, you need to make your own arrangements. Annuities, which offer a payout in exchange for a lump sum of cash, are one way to provide yourself with an income. Helen Morrissey, a senior pensions and retirement analyst at Hargreaves Lansdown, says it is worth considering taking one with some inflation protection built in. “This means you will start off on a lower income than someone who opts for a level annuity but over time your income will increase in line with inflation,” she says.

Pensioners who are taking their income through a drawdown arrangement should be careful to not take out too much, she says. “Taking the natural income from your investments will give you a better chance of beating inflation as your investments should grow over time, which means the income you can take will grow with it,” Morrissey says. She says there may be times when the income you can take goes down, so make sure you have an emergency cash fund so you can cover your essentials.

Don’t put off big purchases

Anything you know you want to buy and have the money to pay for may be better bought sooner rather than later in case the price goes up. Over the past year the cost of cars, home improvement projects and holidays have all risen, and there have been warnings that shortages might put more upward pressure on prices. If you can afford to book next summer’s holiday now, for instance, it may save you cash in the long term.