With bluebells and tulips finally bursting into colour, the garden is not the only place where green shoots are emerging. After what has felt like an interminable season of soaring living costs, sky-high interest rates and falling living standards, things are starting to finally look brighter for the household budgets of millions.
Many are still struggling and are now sitting on higher debt piles, and have finances so squeezed that they are unable to save. Rising council tax bills and stealth taxes are keeping the pressure on.
But millions have turned a corner. Inflation has fallen to a two-and-a-half year low of 3.2 per cent, official figures revealed last week. Prices of some items have even fallen: furniture, meat – and chocolate biscuits.
Household budgets are coming up roses this spring as inflation eases and some prices begin to fall
Workers will be receiving their first pay packets enlarged by this month’s National Insurance cut, from 10 to 8 per cent from April 6. And many are receiving real-term pay rises as annual wage growth was higher than expected at 6 per cent in the three months to February.
But after being forced to manage household budgets with a siege mentality for so long, millions of households have yet to change mode, exclusive figures seen by Wealth from investment platform Hargreaves Lansdown and savings provider Aldermore suggest.
So how do you help your finances unfurl from cost-of-living crisis mode into a more hopeful spring?
1. Shift savings To higher rates
Growing numbers of households finally have a bit more left at the end of each month to save for a rainy day. The UK savings ratio – which is the percentage of people’s incomes that they save – has rebounded this year so far to 8.5 per cent from 6.6 per cent last year, according to Aldermore.
The number of people who feel financially comfortable has increased by 12 percentage points to 38 per cent, from 26 per cent last year. However, because this ability to save more is newly found for millions of households, many are simply letting their extra savings build up in current accounts or low-interest savings accounts – some of which pay a pathetic percentage point or two.
Shift your money into one of the best easy-access accounts and you could earn more than five per cent interest instead. Ulster Bank, for example, pays 5.2 per cent on balances above £5,000, and Cynergy Bank pays 5.01 per cent on balances from £1. Even better, shift surplus funds into a cash Isa, where interest earned is tax free. Chip offers 5.1 per cent on balances above £1 and Plum 5.17 per cent on balances above £100.
2. You can afford to fix for longer
When things are uncertain, it is harder to make long-term financial decisions. It is understandable that savers have been more comfortable putting money into easy-access accounts where they can get to it in an emergency, rather than putting it into fixed-rate accounts where the money is locked away until the end of the term.
But as things stabilise a little, it may be worth considering locking away for longer.
As inflation edges closer to the Bank of England’s target of two per cent, it brings the first interest rate cut closer in sight. That is because the Bank uses interest rates to bring inflation into line, and so when it falls it cuts the need for higher rates.
Financial markets are predicting two interest rate cuts this year, from 5.25 to 4.75 per cent, with the first happening this autumn.
If you’re worried about losing access to your cash, opt for an Isa. These can always be shut – even before the end of the term
When the base rate falls, interest rates offered on fixed-rate bonds are likely to follow. Should this prove the case, it could be worth fixing now to lock in a higher rate.
If you’re worried about losing access to your cash, opt for an Isa. These can always be shut – even before the end of the term.
You would lose out on interest and could forfeit the tax-free status of your cash, but at least you have the reassurance of knowing you could get it in an emergency.
Shawbrook Bank is offering a one-year fix with a rate of 4.71 per cent on balances above £1,000. Fix for three years and it pays 4.4 per cent, five years and you get 4.17 per cent. If you fix for seven years, you could get 3.56 per cent.
Remember that new rules which came into force on April 6 allow you to open multiple Isas within the same tax year, so you could split your money between easy-access and fixed-rate versions.
3. Think long term and invest
As a rule of thumb, experts tend to suggest building up a cash pot worth around three months of outgoings to have in an emergency.
Then if you’re saving up for something in particular that you’ll need money for in the next five to ten years, that should probably be held in cash as well.
But anything that you won’t need to touch for longer than that, you could consider investing. Interest paid on savings has compared favourably to returns on investments in recent months because interest rates have been so high – but this won’t last forever.
As a rule of thumb, experts tend to suggest building up a cash pot worth around three months of outgoings to have in an emergency
Figures from Hargreaves Lansdown show that high earners in particular have more than enough cash saved and so could consider investing as well.
As many as 96 per cent of the top fifth of earners have three months of outgoings saved. They now have just over £16,500 in their current account, £31,000 in savings accounts, and have £750 left over at the end of the month. If that £750 was paid into a stocks and shares Isa each month, and grew at 5 per cent for 20 years, it could produce a nest egg of £308,275 that could be withdrawn tax free, according to Hargreaves Lansdown calculations.
Sarah Coles, its head of personal finance, says: ‘If you stopped investing regularly during tougher times, you need to consider the potential to restart investments.’
4. Remember to boost your pension
When managing your finances in the present is hard enough, it is easy to let saving for the long term in pensions fall by the wayside.
But if you do get a bonus or pay rise, it could be a good time to think about increasing your contributions. The number of people receiving a bonus has nearly doubled in the past six months, according to Aldermore, from 12 to 20 per cent.
If you were lucky enough to have surplus income of £750 a month and put it into a pension where it benefited from tax relief, you could accrue a pot worth £385,344 in just 20 years, according to Hargreaves Landown. This assumes that your investments grow by 5 per cent a year.
5. Buy a brolly for a rainy day
As the outlook for finances brightens, keep an eye on that storm cloud in the distance and get prepared as best you can.
It is almost impossible to predict when it will arrive and what will cause it. For example, few experts saw this cost-of-living crisis coming, caused by the war in Ukraine, and a global pandemic among other factors.
If you do find the pressure easing, consider bolstering your financial fortress now by paying off debts where you can, building up that rainy day fund and making the most from your savings.
After an interminable cost of living crisis, green shoots are finally emerging. So as inflation falls and wage growth is higher than expected…
