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Know How Much Cash to Save Amid Rising Inflationary Pressures in the UK

Consumer prices have been rising exponentially for the past year or so, contributing to the high cost of living UK residents have been struggling with. In June, inflation in the UK hit 9.4%, the highest it has been in 40 years. High inflation means price increases for most items, leading the average consumer to slash spending. Entertainment, luxury goods and holidays are some expenditures taking a cut on many budgets. As the cost of living crisis persists, most people have been forced to evaluate how they spend money, including their investments and saving. A common question at this time is ‘how much should I put away?’ Not many people understand how inflation affects savings. Keep reading to see how to approach savings and investments during this period.   The Impact of Inflation When Saving Before looking at what inflation does to your emergency funds, let’s quickly explain inflation, in case you are unsure. Inflation refers to the loss of purchasing power over time. It’s the measure of increasing prices. The Bank of England tracks the cost of 700 goods to calculate the inflation level. Inflation happens constantly. It explains why £10 isn’t worth what it was 10 years ago. When inflation is high, like what is happening at the moment, it means cash loses value. Your purchasing power decreases. For example, if the inflation is 2%, the buying power is less 2% in a year. If it’s 6%, the purchasing power reduces by the same percentage. When considering putting money away or investing, you must think about the consequences of inflationary pressures. The inflation rate is one aspect that determines if your money works for you. Moderate inflation doesn’t warrant concern, since it encourages spending when people think their money won’t be worth as much as it is now. High inflation is what you should watch out for. If the rate rises when interest rates are low, your savings will decrease. Inflation erodes your savings. The cash you put in the bank for the future will buy you less in a few years. It means you get less value when you get your money back than when you saved it. £1000 paying no interest will be worth £900 a year later if the inflation rate is 10%. Say you save in an account offering 2% in interest. You will have a bit more at the end of your savings term. However, if the inflation rate is higher than 2%, your savings, despite the profit, will still have a lower purchasing power than when you put the cash away. Picking the Right Investments

Cash savings accounts are not the best solutions for long-term investments. If you intend to put cash aside for five or more years, a number of investments prove to be better at beating inflation than a savings account. The stock market, for instance, is a viable alternative if you believe the situation will turn around. Whatever the investment, ensure you analyse your risk tolerance and choose an instrument that caters to it.

Savings should always be part of your budget, whatever the inflation rate. As for how much to put away, a single income household should have 6-9 months of savings, while a two-income household should have at least 6 months of cash. You should have enough cash to meet your needs. Consider allocating about 25% of your after-tax income for savings and investments.

Although understanding the role of inflationary pressures on savings and investments is crucial, it’s not enough to help you make the right decisions. When you want to make money from your investment despite the inflation, you must be careful about what goes into your portfolio. A professional can help you conduct a financial assessment and select the most appropriate investment.

FH Manning Financial Services offers an extensive range of services, including personal finance, to help individuals make sensible choices about their money. If you want to know more about your financial options amid the rising inflation, email Claire at FH Manning Financial Services (clm@fhmanning.co.uk) to set up a meeting.

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