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Notice your money is buying you less at the supermarket? Find yourself handing over more money to buy the same stuff you’ve always bought? 🤔

Welcome to an inflationary world.

Inflation is the economic reality of money being worth less over time. In real terms prices increase, meaning for the same amount of money you’re able to buy less. Here’s a real-world example to help you to understand. 

Imagine that today a loaf of bread 🍞 costs £0.50p, but in 10 years’ time it will cost £1. This means that, while your £1 coin today will get you two loaves of bread, you’ll only be able to get one loaf 10 years later!  

 

A background to inflation

Inflation isn’t a new phenomenon – in some parts of the world, it’s downright business-as-usual. But many of us haven’t experienced price increases like this before, so it’s all feeling a bit unsettling. 

How we got here is as much a political debate as an economic discussion. If you want some background, you can read these articles from:

These present a range of opinions and perspectives since in the economy, as in life, there are lots of different viewpoints and many of them have, at least some, validity.

Our question isn’t how we got here, but rather – what now? 🤷‍♀️

When it comes to inflation, there isn’t a lot you can do about prices going up – it’s a national (at the moment international) menace. 🌎 But you can mitigate the damage by:

  1. Getting your money to go further
  2. Minding your debt 
  3. Making money work for you

 

1. Getting your money to go further 

If you think of your money as a pie, this strategy is about reducing the slice that you’re spending. 🍰

There’s a limit to how much this can counter inflation as, simply put, life costs money. Reducing critical spending on utilities, rent/mortgage and food often isn’t viable but there are some steps you can take to go some way to lessening inflation’s effects. 

Given that electricity is one of the biggest components of these current price rises, watching how much energy you’re consuming should be one of your first ports of call. Turning lights off when you leave a room, closing doors to rooms you’re not using to reduce the draft from them, and programming your washing machine to run during the low-cost period (i.e. post-midnight usage is usually cheaper than midday usage) will help reduce your energy bill. 

Under normal conditions, switching to a different utility provider would be the number-one action to take but given the current political situation, the likelihood of finding a significantly better deal probably isn’t high (though you should always check!).

Electricity isn’t the only spending to watch and there are a myriad of ways you might be able to stretch your pounds further:

🍳 Cook more

🥡 Order in less

💰 Take advantage of cashback

🛍️ Sell stuff you no longer need

🚖 Cut down on luxuries for a while 

 

2. Mind your debt

The response to inflation is almost always for central banks to increase interest rates. The Bank of England has already started doing this and we’re likely to see interest rates continue to climb over the coming months and possibly years. 

It’s important to remember that in the early 2000s, UK interest rates were at about 6% and we’ve enjoyed historically low rates since the Bank lowered rates in response to the 2008 financial crisis. 

It would be historically consistent for the Bank to now increase rates every few months – it wouldn’t be surprising to see them reach 3-4% within the next two years. There are a number of consequences to interest rates being increased, most of which are negative for young people. 

Interest rates are a zero-sum game, with lines usually drawn generationally – there are “winners” (those with savings) and “losers” (those with debt). 

Increased interest rates mean that all debt (which young people hold in greater proportion to older people) becomes more expensive as banks pass the costs of lending on to consumers. So reviewing all your debts and making the necessary changes now could be hugely beneficial.

🔬 The first step is to know what debts you’re carrying. Have a look at everybody you owe money to, from credit cards to mortgages to your student loan, and create a table like the below breaking down how much you owe and the interest rate for each one.

Who I owe Debt type Amount owed Interest rate Due
American Express Credit card £1,300 39.90% Minimum payment of £25, 10th of every month
Santander Overdraft £700 0% 1st May 2024
Student Loans Company Student loan £36,000 4% When I’m earning over £27,295

 

🔁 If at all possible, you want to try to move as many of your debts onto a lower interest option as quickly as possible (provided all other terms and conditions make sense).

0% credit cards give you the ability to pay off what you owe without accumulating interest in the meantime, giving you the ability to pay off your debt without it growing – which is exactly the problem with interest-bearing credit facilities.

 

3. Make money work for you

A quick mention of how you can make your money work for you to counter the effects of inflation. 

As said above, inflation eats away at the value of your money. If you consider the current situation, with your bank savings getting maybe 0.01% interest while inflation is running at 5.4%, in real terms you are losing 5.39% of the value of your money every year. 🤯

So how can investing your money counter this loss in value?

There are many reasons we encourage young people to consider investing early and regularly. High among those reasons is the return that you can expect based on historic stock market data. The FTSE 100, the main investment exchange in the UK, has returned an average of 7% each year for the last 35 years.

An important thing to remember is that, as always, past performance is no indication of future performance – there is no hard-and-fast rule that says the FTSE should or will continue to act in the same way going forward.

But based on a reasonable expectation that markets, for better or worse, will likely continue to offer better returns than savings, it is essential that people who wish to build financial security spend some time getting comfortable with the stock market.

As with most things, the more you understand inflation, the better prepared you’ll feel to deal with it and come out the other side better off. 

 

You can learn lots more about inflation by watching our webinar recording: How to deal with inflation & the cost of living crisis

 

Further learning

Inflation pathway

 

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