2022 is set to become the year of higher bills. The latest figures from the Office for National Statistics (ONS) showed that inflation jumped to the highest level in 30 years, reaching 5.4% in December.
Price rises have hit household essentials with electricity up 18.8% in a year, gas up 28.8%, and petrol prices rising 27.8%. The cost of food is up 4.5% in a year.
Over the next few months, inflation is forecast to rise to at least 6% overall — and possibly as much as 7%, according to Hargreaves Lansdown (HL.L). Britain’s cost of living squeeze will also continue to get tighter over the coming months, particularly when energy bills jump in April, and the chancellor’s tax rises come into effect, including the national insurance rise in April.
The rise in the cost of living is set to squeeze household budgets and put pressure on savings, especially for those on lower incomes as they spend a higher proportion of their income on essentials.
For low-income households, in the bottom 20%, essentials make up 84% of spending, while those on the highest incomes spend 57% of the their total outgoings on essentials, according to Hargreaves Lansdown (HL) research.
Brits spend an average £20,859 on essentials each year — with the lowest 20% of earners spending an average of £6,937 on the basics, and the highest spending £35,764.
On top of essential spending, workers should be aiming to build up an emergency savings safety net worth three to six months of essential expenses and retired people should have emergency savings equivalent to one to three years’ worth of essentials, according to the experts.
“With inflation running at a 30-year high, our incomes are stretched tighter than ever, and to make matters worse, the cost of some of the essentials is rising even faster. It not only makes it incredibly difficult to cut our costs and make ends meet, it also means we need to rethink our emergency savings," said Sarah Coles, senior personal finance analyst at HL.
Here are some tips from the experts on how to protect your savings from the impact of rising prices.
Calculate what you spend
The average person in the UK spends £5,215 on essentials in three months, £10,430 in six months, and £20,859 in a year. Three years’ worth of essentials is £62,577.
However, the average covers an enormous range, so the only way to work out what it means for you is to actually calculate how much you spend on your basics.
Keep going back to your figures
At times of rising inflation, the amount you need in your emergency savings pot will change depending on the rate of inflation.
Higher inflation makes it even more difficult for your savings to keep pace with price rises, wearing down the value of cash savings.
"If, for example, your emergency fund is £5,215 and the cost of your essentials rose 5.4%, then you’re likely to need to boost your savings by another £282. And if your fund was £20,859, you’d need to work on finding another £1,126," said the experts.
Go back to the budget
With inflation squeezing household budgets, it’s an even bigger challenge to find the extra cash to put away for emergencies.
While we can cut back on the little luxuries in life to make ends meet, there’s less we can do about the cost of essential items.
Some ways to find the extra include shopping around for the best possible deals, cutting out luxuries you don't think you're getting enough value from, and even cutting back on some of the luxuries you really appreciate.
It’s always worth going back to the budget to see if there are any lifestyle changes you can make in the short term, to protect yourself in the long run.
If you haven’t made a start on emergency savings yet, now may feel like a difficult time to begin.
"But if you’re waiting for that moment in life when your costs fall and you suddenly find yourself with plenty of money, you could find yourself waiting a lifetime," said they experts.
"Instead, it’s worth doing whatever you can afford, as soon as you can afford to do so. If you’re faced with a nasty surprise further down the line you’ll be grateful for every penny you managed to save.”