Business

Tips on how to improve the state of your finances

ARE you looking for ideas on how to improve the state of your finances this year?

Here are just a few of the many tips we have for you.

One of the major problems we all face in 2022 is inflation, which currently stands at 5.1 per cent and, while it may fall slightly in coming months, it is expected to remain above the Bank of England’s target levels for the foreseeable future.

Inflation is calculated based on the Consumer Prices Index, which is based on the cost of hundreds of consumer items we buy every day, from food to clothing and the costs of entertainment.

After the recent string of lockdown periods, people were eager to relieve their pent-up desire to spend - by travelling, socialising and shopping. Businesses and retailers, meanwhile, struggled to maximise their income when they were finally able to open their doors again, which also played a role in increasing prices. In other words, increasing inflation makes it more difficult to preserve the spending power of our money.

It also affects the real value of our savings. A good example of the corrosive effects of inflation on savings is provided by Bestinvest, who have calculated that even if inflation is just 2 per cent, a savings pot of £10,000 will be worth just £6,100 after 25 years, if left in a cash account.

And if you have money in one of the worst savings accounts, which pay negligible interest of just 0.01 per cent, even a large balance of £50,000 would earn just £5 a year.

Currently, not a single savings account on the market is beating inflation: most savings accounts are now paying less than 1 per cent in interest, and easy access accounts are paying just half of that at 0.5 per cent.

Another challenge for our money is that this year, bills are expected to rise faster than they have for 30 years. We’re already seeing the soaring costs of fuel and energy, but prices of food, phone contracts, rail travel, and many other products are also rising, biting deeper into our cash reserves.

This is why we should be aware of the possibilities of investing rather than saving, if we have a little cash to spare. Investment funds and the stocks and shares Isa are two of the many options to do that. You can transfer up to £20,000 into Isa products this year.

If you have existing investments, this could be the year to boost the performance of that money by having us look for better performing options for you. Leaving your cash in a fund that is not doing so well means you are missing out on returns you otherwise might have had.

On the pensions front, there have also been changes to the pensions triple lock, which would have guaranteed a generous increase in the state pension of around 8 per cent this year. The rise will now be less than half that, so that the state pension will fall well behind rising inflation too.

Another situation where care is required relates to personal pensions, if you are considering buying an annuity with your pension savings. It is crucial to take advice about the different types of annuity on the market.

A ‘level annuity’ pays a fixed rate, but does not protect your money against inflation over time. However, inflation-linked annuities are available that will help protect you against the ravages of inflation.

As I say, these are just a few of many tips we have for you.

Might this be the time to take the first step, and speak to us about the many options to help preserve the value of your money this year?

:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com

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