Lifestyle decisions through the cost-of-living squeeze

With inflation rising rapidly and, quite possibly, a difficult winter ahead, many people may need to make changes to their lifestyles. But with the right advice, those lifestyle changes could remain small yet impactful.

All but the most wealthy within society are now likely to be feeling the cost-of-living crisis, which is set to trigger the biggest squeeze on UK lifestyles in decades. Yet in many ways, we are still in the calm before the storm. Ofgem has announced the energy price cap will leap by 80% in October, and Goldman Sachs recently warned that if spiralling gas prices fail to fall through the winter, inflation could exceed 20% early next year. That is twice what people are already feeling now.

Against this backdrop, it’s clear that choices may need to be made within day-to-day spending to reduce the impact of inflation on our pockets. For many, this has already begun. Some 44% of UK adults found it difficult to afford their energy bills in the second half of July, according to data from the Office for National Statistics (ONS), and more than half of the population (51%) used less gas and electricity in their homes between April and June than they normally would.

Given the effects of inflation have mostly been felt in spring and summer, this winter will no doubt be difficult for millions of households. In a recent study commissioned by the Liberal Democrats, seven in ten UK adults said they will turn their heating on less this winter. Most worrying, 23% said they plan to not turn their heating on at all because of rising energy bills.

“Lifestyle choices vary quite a lot but, across the board, I’ve noticed that people are a lot more conscious of their spending having noticed increases in prices, especially with gas, electricity and fuel,” says David Browne, Independent Financial Adviser at Ascot Lloyd. “As a result, people are a lot more conscious of their decisions, particularly their consumption of energy at home. I think generally people are more conscious than they ever have been about how much energy they are using.”

Small lifestyle changes

Thus far, most people have looked to reduce spending through smaller lifestyle changes. As well as general energy-saving behaviour at home, more than one in three UK adults who reported their living costs had gone up reduced their spending on food and essentials in the second half of July, the ONS’s research discovered. Some 57%, meanwhile, said they had reduced their spending on non-essential items including clothes, subscriptions and meals out.

Efforts to reduce the weekly shop by opting for cheaper brands or shopping around more are becoming more prevalent. Analysis of data from Trolley Grocery Price Index showed that some staples have risen by 20%, with four pints of milk now costing, on average, 34p more than a year ago. A six-pack of Heinz baked beans now costs as much as £5 in some stores, which is causing many consumers to retreat from their usual preference for premium brands. According to the BRC-Nielsen Shop Price Index, food prices leapt 9.3% in August after a 7% jump in July.

Larger sacrifices are less common so far. Spending on hospitality and international travel in July was more than twice the amount in the same month last year, as many people sought to enjoy their first holidays following the Covid-19 pandemic, according to Barclaycard data. People will likely look to go on less expensive holidays if they can, such as UK staycations, rather than sacrificing a vacation altogether. Equally, there are other expenditures on the more substantial end that people will no doubt be keen to maintain, such as children’s school fees.

“In my experience, generally, people want to make a greater number of smaller sacrifices to keep their kids in the schools of their choosing,” says Browne. “I've got a few clients with children of school age and they all want to ensure that there's provision for their children to go to the schools that they want them to go to. With holidays, even though there is still a willingness to go away, I’m seeing that a lot of people are opting for small breaks within the UK, rather than more lavish holidays abroad.”

Other routes to free up funds

There are other ways to save money that people might not be aware of, such as switching your home insurance provider. Despite widespread price increases across the economy, the average price paid for both buildings and contents cover has fallen over the last year, according to the ABI’s Household Premium Tracker. In the second quarter of 2022, the average price paid fell by 10%, leaving them at their equal lowest level since ABI began collecting the data in 2012.

Your financial adviser will be able to help you find these opportunities for cost savings while also identifying ways to free up funds elsewhere, without jeopardising your long-term financial plan. Equity release, for instance, is an increasingly popular way to supplement income or support children onto the property ladder for people in retirement who own their property outright but have only a small pension pot. For anybody interested in gifting money to their children, either to help them through the cost-of-living crisis or to get them on the property ladder, it’s important to discuss the different tax implications with a trusted independent financial adviser.

“Financial planning can help people maintain the lifestyle they want and support their families, even if they might be concerned about the rising cost of living,” says Browne. “I often see that people who haven't taken advice have a lot of money in cash savings. The interest rate you'll get from the bank is perhaps 1% at present, whereas inflation is upwards of 10%. So in real terms, the value of your money is reducing each year, based on inflation being higher than interest rates.

“One of the main things we do is look to ensure people have the emergency funds they need, so enough money in cash to be easily accessible, but then beyond that – the money that's going to be there for five years plus – invest it so that it can potentially grow in line or above inflation. That could make your money go further. And when people have already taken advice, and they're looking to take an income, we can also make sure that income is taken in the most tax efficient way. They could be paying more than they need to, and therefore taking advice and making sure things are set up in the right way will mean more money will be available in the future. Investment involves risk.

“The average life expectancy is now high and you also have to consider the potential need for care in later life. Expenditure is generally fairly high at the start of retirement and then it starts to drift off as people become less active, but then if they need to go into care, those costs really increase again. Given the current unpredictable inflationary environment, assessing what those care costs could be years down the line is a great challenge, but we have modelling tools to help.”

If you’d like to discuss ways in which you can get you and your family through the cost-of-living crisis more comfortably, please contact your Ascot Lloyd Financial Adviser or book a call back with a member of the team.