According to a recent report in the Guardian, household income is facing the biggest squeeze in 50 years and could drop by an average of £1,000 this year.

With the Consumer Price Index (CPI) already at 6.2%, the cost of living crisis is due to worsen in the coming months.

An economy still recovering from coronavirus, a global supply chain shortage, and now fears of a prolonged war in Ukraine could see the UK’s poorest families’ cost of living rise by 10% by the autumn, according to the Resolution Foundation’s recent “Catch 22” report.

But there are simple steps you can take to manage your household budget while continuing to secure a stable financial future.

Keep reading for five of them.

1. Keep track of your income and outgoings

The cashflow modelling software we use at the Pension Planner incorporates rigorous academic evidence and over 100 years of market data, but cashflow modelling can be as simple as a single spreadsheet.

Track your income and outgoings throughout the month to see what disposable income you have. You might find that you have more than you thought. If so, great. Keep reading to find out how you might best use this extra money.

If you have little or no disposable income at the end of the month, a spreadsheet should allow you to see where your money is going, helping you to cut back in the right places.

Shopping around for new deals, switching bank accounts, and cancelling unused subscriptions might allow you to reduce your expenditure, and so too could lifestyle changes like cutting back on restaurant meals.

2. Identify categories within your expenditure

To budget successfully, you’ll need to split your outgoings into categories. You might opt for the “five-category” budget, breaking your spending down into housing, transport, other living expenses, savings, and debt repayments.

Equally, you might find that just three categories make for a simpler approach. Split your outgoings into:

• Needs – like your mortgage, shopping bills, and heating
• Wants – including cinema trips or restaurant meals
• Savings – the money you put aside each month to build an emergency fund or invest into a pension, for example.

3. Use the “50/30/20” rule

Once you have identified your needs, wants, and monthly savings, shift your expenditure to fit into the “50/30/20” budgeting rule. You’ll need to take your monthly income and split it so that:

• 50% pays for needs
• 30% is spent on your wants

• 20% is put away in savings or investments.

Be sure to do this at the start of each month. More on the reasons why later.

4. Build an emergency fund, but don’t keep too much

The importance of an emergency fund

While the best way to distribute your 20% savings allowance will be different for everyone, consider beginning by building an emergency fund.

We would normally recommend you hold between three to six months of household expenditure in an easy-access cash account so that it is readily available in an emergency.

The coronavirus pandemic highlighted the importance of a rainy day fund, with lockdowns and the furlough scheme diminishing income streams and causing financial hardship for many.

While the UK is continuing to recover from the pandemic and regular income has resumed for many, accident or illness can occur at any time. If you are reliant on your regular workplace income to pay your “needs” be sure to have an emergency fund.

Why you shouldn’t hold too much

The current economic climate of low savings rates and high inflation means that the money you hold in cash is likely to be losing value in real terms.

Be sure to hold only what you need to tide you over in an emergency. Any funds above three to six months’ worth of expenditure could be losing real-terms value sat in your high street bank and the money could be working harder for you elsewhere.

5. Pay your future self first

When the coronavirus pandemic arrived, those that lost their jobs, or had hours cut, were forced to make some difficult decisions.

When you’re struggling to put food on the table in the present, planning for your future can seem less important. This resulted in some workers cutting, or even stopping, contributions to their workplace pensions.

With a solid financial plan in place and a dream retirement to focus on, the current cost of living crisis shouldn’t affect your long-term retirement plans. But one way to make sure it doesn’t is to pay your future self first.

When you budget for the month, whether you use the “50/30/20” rule or a similar rule based on the five-category budgeting strategy, be sure to put your “savings” money aside first.

You can then budget with what’s left, safe in the knowledge that you have investments working for you, helping to ensure your dream retirement remains attainable, whatever the future brings.

Get in touch

At the Pension Planner, we can help you build a long-term plan that is robust and able to withstand periods of economic uncertainty, regularly reviewing that plan to ensure your goals remain attainable.

If you would like confidence, peace of mind, and a sense of control over your financial future, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note:

The value of your investment 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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.