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Is it good to have cash when inflation is high?

Everyone needs cash set aside as an emergency fund but inflation and savings do not work well together. When inflation is rising, your savings are losing value. Earning interest can help counteract inflation if the interest is high enough.

thetimes.co.uk - Top ten inflation busters - Times Money Mentor
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Inflation hit 10.7% in November, falling slightly from 11.1% in October. While the dip is welcome, the cost of everyday items are still rising at a rapid pace. In response, the Bank of England has raised rates nine times since December 2021, from a record low of 0.1% to 3.5% in December. Further rises are expected into 2023. There are ways you can protect your money from the ravages of rising prices. Below, we explain how to limit the damage to your savings and how inflation-busting investments can help.

This article covers:

Related content: Calculating inflation to plan for the future

Inflation means the cost of living rises, meaning you get less for your money

What is inflation?

Inflation is the measure of how much goods and services are going up by over time. When prices are rising, it means £1, £10, £20 or £100 buys less than it could before, and so your money is worth less. A popular way of explaining the impact of inflation is with a Cadbury’s Freddo bar. In 1999, this small frog-shaped chocolate bar cost 10p but today it would set you back 25p. If you’d had £10 in 1999, you could have bought 100 Freddo bars but today that same £10 would only buy just 40 Freddos.

Better for your waistline, bad for your wallet.

If you want to understand more about how inflation is measured, why it’s so high at the moment and what that means for your money, check out our article on CPI vs RPI inflation.

1. Inflation-proof your savings

Everyone needs cash set aside as an emergency fund but inflation and savings do not work well together. When inflation is rising, your savings are losing value. Earning interest can help counteract inflation if the interest is high enough. Inflation in the year to November was 10.7%. The Bank of England had forecast the figure to be as high as 13%, had the government had not stepped into freeze energy prices at £2,500 a year for the next six months. While savings accounts are pushing 5% at the moment, it is not near 10.7%, so the interest you are being paid is not fully protect your cash from losing value. But as a place to store emergency savings they are the best you can get. The best rates tend to be with the newer online-only and app-based banks rather than the big high-street banks so make sure that you shop around. We have rounded up the best savings rates here. If you have any savings on top of an emergency fund, you could lock them up for a fixed period as they tend to pay more. But you need to ensure you will not need this money before the end of the period or you could be hit with a fine. It could make sense to use extra savings to pay off a loan or mortgage instead, if the interest rate on the loan is higher than on the best savings account.

2. Make inflation-proof investments

Investing can be another way of beating inflation – if the returns on putting money into the stock market, for example, are higher than the rate of inflation. However, investing in assets such as shares comes with the risk that you could lose some or all of your money. If you’re new to investing, check out our guide to investing for beginners. If you want to reduce the risk, avoid being too exposed to a small number of assets or sectors. A good way to diversify is by buying into investment funds. Funds can invest in various assets, so can spread your money across bonds, property and shares in different sectors.

We explain here how to choose an investment fund.

What investments do well during times of high inflation?

If you like the idea of investing in individual companies, the best stocks to choose during times of high inflation are businesses that can increase the price of their products to cover higher costs without losing customers. This is called “pricing power”. Companies that have this often command brand loyalty, such as those that specialise in luxury goods like LVMH, the owner of Louis Vuitton, or big names such as the tech giant Apple and the sportswear maker Nike. Firms that deliver essential products or services, such as healthcare, like the drug maker Pfizer, also find it easier to increase prices without affecting sales. There are also investments designed to keep up with inflation. Inflation-linked bonds are loans to governments or companies that pay interest that rises with inflation.

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Check the measure of inflation it tracks or your returns may be lower than you expect. RPI, is the retail prices index and tends to be highest.

If you want to know more about the different measures, check out our article: CPI vs RPI inflation: what’s the difference?

3. Fix your mortgage

The Bank of England has raised the base rate nine times since December 2021, from 0.1% to 3.5%. The latest rise of 0.75 percentage points on 15 December, was the biggest hike in more than three decades.

Further increases are expected as the Bank tries to curb inflation.

Lenders pass these increases on to customers by raising rates of interest on mortgages. If you are one of the two million people who have a tracker or variable-rate mortgage, or your fixed-rate deal is coming to an end, now may be the time to consider switching to a new fixed-rate mortgage. A fixed-rate mortgage has a set interest rate for two, three, five or ten years, so your repayments will be the same every month for that period. It won’t leave you at the mercy of further base rate hikes. Mortgage rates are changing quickly – and in one direction: up – so make sure you keep up-to-date and shop around. Those who have a deposit or equity in their home of at least 40% tend to get better deals. If you’re looking for a new mortgage, try our mortgage comparison tool below to search for the best deals. Find mortgage deals with our best buy tool Times Money Mentor has teamed up with Koodoo Mortgage to create a mortgage comparison tool. Use it to benchmark the deals you can get — but if you want advice, it’s best to speak to a mortgage broker. This is how the tool works: You can search and compare mortgage deals It only takes a couple of minutes and no personal details are required to search Once you’ve got your result, speak to a mortgage broker if you need advice Compare mortgages Product information is provided on a non-advised basis. This means that no advice is given or implied and you are solely responsible for deciding whether the product is suitable for your needs.

4. Earn cashback

Websites such as TopCashback and Quidco give you money back when you shop at a vast array of retailers through their site. For example you can up to 10% cashback when you shop at Very or £100 at Currys with Quidco. At Topcashback you can get up to 2.5% at Amazon, or up to 12% cashback at M&S. You can earn more by referring someone else: Quidco gives you a cashback bonus for every friend you refer who earns £5 cashback while TopCashback will give you £25 once your friend has earned their first £10. Airtime Rewards is also a great way to get cashback that will help you save money on your phone bill. The free American Express Platinum Cashback Everyday credit card pays 5% cashback on purchases up to £100 for the first three months (26.6% APR). It is then 0.5% after that on spending up to £10,000, rising to 1% on spending over that amount. Meanwhile Chase pays 1% cashback for the first 12 months on purchases made with its debit card.

You can read our round-up of the best rewards credit cards here.

Polly Arrowsmith always checks for cashback deals and shops in the reduced section of supermarkets Polly Arrowsmith, 55, a marketing director living in London, earned £178 through a cashback website last year. She always checks whether she can get cashback before buying something online and she also buys all her Christmas shopping in the Black Friday deals. “I do like to treat myself, but I’ll never buy anything straightaway (unless it’s something I urgently need). I wait to see if the price comes down or if a discount or cashback deal becomes available. Sometimes I’ll wait up to six months to try and get money off.” If you frequently shop at one retailer or supermarket, check if it has a rewards scheme. The free M&S Bank Rewards credit card earns you four points for every £1 spent at M&S for the first year (dropping to three points per £1 after that) and one point for every £5 spent elsewhere (21.9% APR).

Each point is worth 1p in Marks & Spencer vouchers.

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There are deals to be found in other supermarkets’ loyalty schemes. With the Tesco Clubcard you can get a sandwich meal deal for £3 rather than £3.50; at Sainsbury’s you can get personalised offers on products you buy regularly if you are a Nectar card holder.

6. Buy property

Investing in property can be a good way to beat inflation and diversify your investment portfolio. House prices have tended to rise well above the rate of inflation in the past. That is not the case at the moment, with inflation at 10.7%. UK average house prices increased by 9.5% over the year to September 2022, down from 13.1% in August 2022, according to the Office for National Statistics. The drop in September was due to the sharp rise the previous year, which coincided with changes to Stamp Duty Land Tax. By purchasing property as a buy-to-let investment, you could get rent as a regular source of income, and landlords may be able to raise rents in line with or above the rate of inflation. However, there are costs attached, including stamp duty, capital gains tax (on sales of buy-to-let homes) and income tax on rental income and renovation expenses. If you’re thinking of becoming a property landlord, read our buy-to-let tips here.

Watch our video below for other inflation busters.

7. Review your spending

While budgeting won’t make the cost of essentials go down, it can make higher prices easier to manage. Write down how much money is coming in and everything you are spending, then look at where you can cut back. Cancel unused subscriptions with the company directly, through your banking app or in the subscription settings on your phone.

8. Lower your household bills

In October, energy bills rose from an average of £1,971 to £2,500. The price cap limits how much companies can charge customers on default tariffs per unit of energy used, not your entire bill. The cap was originally going to be a much higher amount of £3,549, but the government imposed its own limit, which will last until April 2023. Switching to paperless billing, turning down your thermostat and installing insulation can help to keep costs down. If you usually wash your clothes on a super-hot cycle, change the temperature to 30C to save electricity and run it on a short wash. When it’s time to buy or replace an appliance, look for a high energy-efficiency rating. Read here for more energy-saving tips.

9. Get money off your childcare

Almost 800,000 eligible families are currently not taking advantage of the government’s tax-free childcare scheme. Through tax-free childcare, parents get £2 for every £8 they spend on childcare – up to a total of £2,000 per child each year. This can be used to help pay for the cost of a childminder, nanny, nursery or after-school club.

Find out more here about tax-free childcare.

10. Cut your grocery costs

Tonnes of food is thrown out by British households every week. Often, people misjudge how much they will need or get tempted by supermarket offers, which means spending more than necessary.

How to cut your food spend:

Make a list of what’s already in your cupboards and commit to using up ingredients.

Go to the supermarket with a list and stick to it.

Learn to cook on a budget using online recipes.

Buy individual ingredients such as loose carrots, rather than a whole bag.

You could also use apps such as Too Good to Go or Olio to get local food for free or at a hefty discount. Polly Arrowsmith shops at all the major supermarkets to compare prices and take advantage of last-minute price reductions. Polly, who lives in Islington, says her local Tesco reduces prices at 8am, but at M&S and Waitrose it’s 6pm and 7pm. “I tend to pick my shopping times to coincide with when supermarkets start reducing items on the verge of going past their use-by dates. Most products can be used a day or two after the use-by dates. Use your freezer to store the food so you can take advantage of price reductions but don’t have to eat it straight away.” For other tips, check out: 17 ways to cut the cost of your food bill.

thetimes.co.uk - Top ten inflation busters - Times Money Mentor
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