Winning the battle against inflation: your two-minute wealth check

Judy Armstrong


3 min read

With the cost of living going up and salaries stagnating, it’s now more important than ever to have a robust financial plan. So how well prepared are you? Find out with this super-quick wealth check.

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It’s not easy talking about money, especially when it comes to our salary and savings. So it’s tough figuring out if your finances are in good shape or not. Here are five things to think about to help guide you.

1. Your savings vs spending ratio

Having good savings habits is a sure-fire way to get yourself on track with your finances. And using a budget can help you form the habits.

The popular 50:20:30 rule, also known as the 50:20:30 budget, offers a good guide for how to use your post-tax income:

  • Set aside 50% for all the necessities in life (rent or mortgage repayments, utility bills and food)
  • Keep 20% for ‘getting ahead’ (to save or invest for the future, your ‘rainy day’ fund, pensions, debt payments, and so on)
  • Spend the remaining 30% on your lifestyle choices (the gym, holidays, restaurants, and so on)

Does that sound like you? Or do you need to do some budgetary management to get on track?

2. Rainy day fund

It’s commonly advised you should have three to six months’ salary in reserve as cash – i.e. in your bank and readily available. This ‘rainy day’ fund is to help you sustain your living expenses should you be between jobs or need to manage another unforeseen life event.

Do you need to bolster your emergency fund? Or perhaps you have more than enough already stored up, in which case…

3. Put your money to work

Always make sure your surplus cash (whatever is left of your 20% after your rainy day fund and debts have been sorted) is working as hard as it can for you.

If the interest you’re earning on your savings is below inflation, you’re effectively losing money. With inflation currently at a four-year high, it’s worth shopping around for the best savings rates offered by the high street banks or to consider other ways to make your money work harder for you.

For example, perhaps it’s time to dip your toe into the world of investing? Over the longer term, investing offers the potential for inflation-beating returns. Although remember, as with all investing, your capital is at risk.

4. ISA: Use it or lose it

Every year we get an ISA (individual savings account) allowance from the government. This year the allowance is £20,000 – the highest ever. You can save or invest any amount up to £20,000 into an ISA and any returns or interest you might make on your money in the ISA will be free of income tax and capital gains tax.

Are you making the most of your ISA allowance? Use our ISA calculator to compare the typical returns you might expect from cash ISAs and stocks and shares ISAs:

Try out our ISA calculator

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5. Take the long road

Once you’ve sorted your budget and rainy day fund, and shopped around for inflation-beating saving or investing options for the medium and long term, your personal finances should be in a much better position.

But don’t forget to also think much further down the road – having a longer-term financial plan is crucial. A key part of that plan is your pension; is yours sorted? Use our pension calculator to see if you’re on track to receive the retirement income you’d like:

Try out our pension calculator

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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. Past performance is not a reliable indicator of future performance. A stocks and shares ISA or a pension may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA or a pension is the right choice for you, please seek independent financial advice.

 

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Judy Armstrong

Judy, Nutmeg’s content manager, writes on a variety of financial and lifestyle topics for Nutmegonomics.


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