Should I invest during a cost-of-living crisis?

The Nutmeg team

read 7 min

We all know times are tough, but for those with money to put aside savings rates are on the rise; and for those with a longer-term goal, investing may also light the way towards a brighter financial future.  

What defines a cost-of-living crisis?  

The current cost-of-living crisis refers the fall in ‘real’ incomes (adjusted for inflation and after taxes and benefits) that we’ve seen in the UK since late 2021. Since then, we’ve seen a rapid rise in inflation representing the highest rate in price rises across the board for decades. This inflation has outstripped wage growth.  

In other words, we are all paying a lot more for essentials, like food, heating, rent and fuel, with many of us having less in our pockets than in previous years.  

How to manage your finances during a cost-of-living crisis 

During the tough times, it makes sense to curb your spending on the non-essentials; perhaps you’ve started to eat out less, cut back on digital subscriptions, or postponed a holiday. Creating a budget to keep track of your spending each month and making sure you cut back on expensive credit card debt are sensible ways to take control of your finances. There are plenty on online resources to help you do this. 

If you do have some money to spare at the end of each month and can afford it, then you should not neglect the importance of saving or investing.  

For those who will need to access their money within the next three years, savings accounts should be the first port of call. As inflation has risen, so have interest rates as the Bank of England tries to keep the economy from overheating. This means the rates that banks and building societies will offer on their savings accounts and cash ISAs have gone up too. This is of course good news for savers.  

Saving versus investing 

Savings rates are certainly much better than they have been in years, particularly if you are happy to lock your money away for a number of years. In the decade or so following the financial crises of 2008 many accounts were stuck at below 0.5% interest. At the time of writing, the best three-year cash ISA savings rate stood at 3.95%, according to,uk. For instant access, the rates will be lower.  

If you can afford to put some money away for the longer-term – preferably at least three to five years – then investing may be a good option to consider. In difficult times, it can still be beneficial too look to making your long-term financial goals a reality.  

Inflation is currently at an exceptionally high level in the UK today with the current rate, as measured by the headline Consumer Prices Index, at 10.5% for December 2022. Whether saving or investing, it will be difficult to keep ahead of inflation when price rises are so high. However, expectations are for inflation to begin to fall this year; as savings rates could fall with it, this may in turn make investing in equities and bonds more appealing. Generally speaking, the best chance you have of beating inflation in the long-term is by taking some risk, and that invariably means investing. 

Is now a good time to invest? 

While you may read the headlines about daily market movements, timing exactly when to invest is something that very few have proven to have mastered, if at all. Instead, we would advocate time in the markets. In our opinion, there’s no specific answer as to when you should invest as it all depends on your personal circumstances: how long you are investing for, and the risk you can afford to take.  

  • I’ve not invested before – should I start now? 

If you can afford to put some money away for the next five years plus, ideally with a goal in mind, then investing may well be a good option for you. On the other hand, if your finances feel stretched during these tougher times then you must first make sure you have enough money put aside to cover your current and future outgoings and any potential emergencies.  

With rising inflation comes economic uncertainty, and ongoing grim headlines talking about recession, but this does not necessarily mean that markets will flounder also. If you start investing now, conditions could be very different several years down the line as you get closer to your financial goals.  

As we cover later in this blog, you may well wish to start investing with a small amount – or small, regular contributions – to begin with and possibly increase your contribution as and when your personal circumstances change.  

You can read more about investing for beginners with resources on the Nutmeg website. You can also book a free call to speak to a member of Nutmeg’s team of experts if you have any questions about the different investment options. 

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  • I’m already invested – should I change tact?  

If you already have a goal in mind and have set the right risk parameters with a suitable timescale, then the chances are that you do not need to change your investments, unless your circumstances have changed.  

If you are investing over several years, then there’s a high likelihood that you will invest through different market conditions, when your investments can move up and down through the usual market cycle. A cost-of-living crisis such as we are seeing currently is not something that occurs regularly, but markets react to a myriad of factors beyond just economic conditions. They are impacted by things such as individual company announcements, government policy, and technological change – and so can still rise during the tougher times.  

However, we understand how current conditions can cause nervousness, and if this is the case Nutmeg investors can easily amend their risk level if required. Those that invest elsewhere may need to contact their individual wealth manager or investment provider if they want to change their risk approach.  

If your personal finances have been impacted by the current conditions, you may also wish to consider reducing regular contributions to your investments, or pausing ongoing investments for the time being until circumstances improve.  

The benefits of long-term investing  

While past performance is no guarantee of future returns, a multi-asset approach to investing, such as through a wealth manager like Nutmeg, has proven to deliver across longer time periods – and that means staying invested both during the good and the bad times. Indeed, the longer you stay invested, the less likely you are to lose money. However, please bear in mind that nobody knows the future direction of markets.  

The chart below shows average yearly returns from an archetypal multi-asset portfolio (60% in global equities/40% in bonds), since 1990. As you can see, there have only been seven years where returns have been negative over that long-term time span. 

Chart: Average multi-asset portfolio yearly returns since 1990  

Average multi-asset portfolio yearly returns since 1990

Source: Nutmeg/Macrobond

How should I invest? 

The most prudent way of investing is through a tax-efficient structure, such as an ISA, LISA, or JISA if you are investing for a child’s future. Adults can contribute up to the maximum ISA allowance of £20,000 per year – which is free of tax on growth, returns or interest.  

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Starting, or continuing to invest in a private pension is also a worthwhile consideration, even during a cost-of-living crisis. Remember, while times may be tough today, a pension is very much a longer-term investment, usually over several decades.  

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Is investing small amounts worth it?  

We recognise that filling your ISA allowance may not necessarily be achievable during a cost-of-living crisis.  

Setting up smaller monthly contribution works better for many; while you may not necessarily be contributing a significant amount to your investment pots, you will still benefit from the power of compounding. This is less about how much you can afford to invest right now, and more about how long the investment has to grow.  

The basic concept of compounding is simple. In the first year of investing, you generate returns on your initial investment. In the second year, you invest the capital plus the returns, and you generate further returns on the total. And so this goes on, and your money could snowball into a pot that’s far bigger than you initially anticipated.  

Of course, investing is always subject to the ups and downs of the stock market, so returns aren’t guaranteed every year. However, by investing over a long timeframe, you give your investment time to potentially make up for any losses. 

Our compound calculator can help illustrate the impact that regular investing can make to your long-term future.  

Investing for a future you 

Short-term economic uncertainty can make us all re-assess our financial situation, it can be a good reminder to look at our income and outgoings and to help us understand if we’re on track. Should you still be able to afford to invest after paying for the essentials, there are plenty of resources available if you need guidance in thinking about your financial future. For example, Nutmeg’s life moments guide may be useful in determining how you may want to invest across the decades. We have also put together seven investment tips for 2023.  

You can also book a free call to speak to a member of Nutmeg’s team of experts if you have any questions about making the most of your money. 

Risk warning 

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax treatment depends on your individual circumstances and may be subject to change in the future. Past performance and forecasts are not reliable indicators of future performance. 


The Nutmeg team
This was a team effort from Nutmeg.

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