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09 Feb 2023

Saving through the cost of living crisis

David Bowen

David Bowen | Senior Financial Planning Director

How to avoid immediate pressures derailing your long-term plans.

From a financial perspective, 2022 was a difficult year for many in the UK. Global events provided a challenging environment for investment growth, while rising costs have impacted people’s capacity to save.

One year is a short period in the investment world, and although most financial assets suffered over 2022, the start of 2023 has given us reason to be optimistic. However, the cost of living crisis is rolling on, and we can’t simply await its end, we need to consider how we keep our savings on track despite these tough conditions.

The cost of living crisis and retirement

It’s very clear that the crisis is affecting people at the present moment with rising costs. Though it’s not as immediately evident, it is also increasing the cost of retirement in the future and the income level that will be needed for a comfortable lifestyle.

It’s likely that you recently had to review your household budget in light of the former of these two facts, but many people are neglecting the latter. We hear too many stories of people reducing or stopping pension and savings contributions to cope with the increased cost of living.

How much you need to save

One of the most common questions people have about their finances is how much they should be saving each month. Unfortunately, there’s no direct answer to this, as it’s different for everyone. It’s a combination and balance of current affordability versus what you wish the money to do in the future.

For example, if you wish to retire early and live comfortably, you need to have built up the necessary level of savings. If your current budget doesn’t allow you to set aside the funds you’ll need to achieve your goals, it should be reviewed.

Changing your saving mindset

Historically, many have held the mindset that one should save whatever is leftover at the end of the month. This mindset needs to be reversed.  A more successful strategy is to make savings first, then spent what is left over, treating pensions and savings as a necessity like housing or utilities.

How can you afford to prioritise saving?

Inevitably, many people are in a very difficult position now where cutbacks need to be made. However, it’s important to understand that pensions are one of the most efficient ways to save and, therefore, one of the least efficient cutbacks.

If you’re a basic rate taxpayer, a £1,000 contribution to your pension only costs you £800. To put it another way, cutting your contribution to zero would give you £800 now, but you’d be missing out on £1,000 towards your pension – or even more, if your employer matches your contributions. The long-term effects of reducing or cancelling contributions, especially if you’re early in your career, can have a huge impact on the amount that is saved in the future.

Making a plan that works for you

We understand that people are struggling with how to allocate their limited resources to meet the competing needs of the present and the future. This is where discussions with a financial planner can really help put a proper plan in place. If you’d like to get personalised advice based on your specific financial situation, get in touch to speak to a financial planner.

About the author

To contact or read more about David Bowen, visit his biography here.

Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.