By David Lamb CFP™ MCSI
For those of us whose memories stretch back that far, in April 1976, Brotherhood of Man and Abba were at the top of the UK music charts, Jim Callaghan became Prime Minister and the Ford Escort was the UK’s best-selling car.
The Bank of England base rate was 9.75% and inflation was 13%, (having peaked at 25.9% the previous October).
Moving back to today, 46 years later, inflation is estimated to be heading for 13% or more again. But what does this mean for us and our standard of living?
Key findings of independent think tank the Resolution Foundation, which is focused on improving the living standards of those on low to middle incomes, in its latest briefing note include:
- average real pay in Q2 will be 9% lower than two years earlier, and will wipe out all pay growth since 2003
- real household income will fall by 5% in 2022-23 and 6% in 2023-24 – a drop of £2,800 for those earning the average salary
- a combination of earnings stagflation and the energy shock means the country is on track for two decades of lost income growth.
The effects are already being felt. Research by insurance giant Aviva has found that 40% of 55 to 64-year-olds are struggling financially and ‘up to their eyes in debt’.
More than a third of over 55-year-olds feel they are having money difficulties; they typically spend a greater proportion of their income on food, energy and fuel, with it being calculated that they would need an extra £257 each month to feel financially secure.
75% of these people are looking for ways to boost the income, and a third look for food reductions in supermarkets on a regular basis. A further 8% say that they have had to delay retirement to make ends meet.
Added to these stresses, many of this generation are trying to support elderly parents, whist still supporting grown up children.
Research by another insurer, Legal and General, has found that the average working household is only 19 days from a financial crisis if they were to lose their jobs. Almost two million adults have no money left at the end of the month, an increase of 330,000 over the previous two years.
Older workers tend to have more reserves, providing up to 99 days in the event of a loss of income but these households are also more likely to overestimate the emergency fund, assuming they can last for 180 days.
The main issue with this is that this age group have less time to rebuild their funds before retirement.
Accumulating an emergency fund is essential and we would recommend holding the equivalent of between three and six months’ income. National Savings and Investments Premium Bonds can make an excellent home for an emergency fund.
Financially, most people expect a tough winter, but what can be done to ease the pressure? In my next blog, I will suggest a cost of living action plan.
