5 simple budgeting tips to help you tackle the cost of living rise

On 13 April 2022, the Office for National Statistics (ONS) confirmed that UK inflation in the 12 months to May 2022 had reached 9.1%.

As rocketing petrol prices and household fuel bill increases are exacerbated by Russia’s invasion of Ukraine, the UK cost of living is rising at its highest rate in 30 years.

The Office for Budget Responsibility (OBR) has been forced to downgrade its growth forecasts for the economy while the Bank of England (BoE) confirms that the Consumer Price Index (CPI) might not return to its 2% target until 2024. Inflation is expected to reach 11% by October.

The current economic climate could force millions into poverty in 2022. But at Logic Financial Services, we know that solid financial plans and a few simple budgeting tricks can make all the difference, helping you to remain financially stable, even when times are tough.

Keep reading to find out more.

1. Be wary of the amount of money you hold in cash

While we would always recommend you hold a rainy day fund to tide you over in an emergency, with inflation high, you might hold more than you need.

Your emergency fund should be enough to cover three to six months of household expenses, should an accident or illness cut off your employment income.

If you are retired, though, unexpected expenses could have a huge impact too, forcing you to go back to work or cash in other investments. For this reason, we recommend an emergency fund of £25,000 or a year’s expenditure in retirement.

Emergencies can occur at any time, so it’s important your fund is held in easily accessible cash while being aware that in the current climate of low savings rates and high inflation, cash funds will quickly lose value in real terms.

Hold only what you need to cover lost income, or unexpected expenses, while you get back on your feet.

2. Use simple budgeting to monitor your outgoings

You can use a simple spreadsheet to list your income and outgoings each month, helping you get an idea of disposable cash (if any) you have. This can help you to manage your monthly expenditure.

Making a list also makes it easy to see where money could be saved. Unused gym memberships, forgotten subscription services, or excess expenditure on luxuries like restaurant meals or theatre trips will stick out.

Decide where savings can be made, and then work out what to do with the excess disposable cash.

If you are approaching, or in retirement, and have large – potentially one-off expenditure planned – we can use sophisticated cashflow modelling tools to help, so get in touch.

3. The “50/30/20 rule”

Use your cashflow modelling spreadsheet to split your monthly expenditure into three distinct categories and then budget the amount you spend in each as follows:

  • 50% of your monthly income can be spent on needs like household bills, food, and fuel
  • 30% of your household income can go on wants, or “non-essentials”, like holidays, theatre trips and meals out.
  • 20% should be put aside for the future by paying money into your pension or the investments you hold.

To ensure you stick to your budget, be careful with the order in which you allocate these expenses.

4. Pay your future self first

Paying your future self first means putting the 20% for pensions, savings, and investments aside first. The 30% of your income that will go on “wants” should be assigned last to ensure you only spend what you can afford, once your “needs” and your future self are accounted for.

When times are tough, it can be tempting to concentrate on the present and forget about the future. But stopping pension contributions or not keeping track of your investments could have huge consequences in the years ahead.

Staying invested when times are tough is crucial if you’re to see the benefit of rising markets, and the effects of compound growth (not to mention the tax efficiencies) of pensions mean that stopping contributions is likely to be a bad idea, potentially jeopardising your dream retirement.

5. Speak to the experts

At Logic, our team of expert financial planners can help you to manage your household budget in the present while planning for your dream future.

While the current cost of living crisis may well mean tightening your purse strings, your long-term goals are unlikely to change and that means your plans needn’t either.

Get in touch

If you’re worried about rising inflation or any aspect of your long-term financial plans, speak to us now. Please email us at info@logicfinancialservices.co.uk or check with your adviser.

Please note

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.