How to inflation-proof your finances

We’ve all been feeling the impact of rising prices, on everything from groceries and petrol to energy bills and big-ticket items and inflation has reached 10.5%.

Globally, life is getting more expensive, thanks to a perfect storm of supply chain disruption driven by Covid-induced shortages and demand spikes, rising energy prices and too few workers for too many job openings, all of which push prices higher.

The Bank of England has raised interest rates to 4%, and while its forecasters say that inflation has likely peaked, the cost of living remains very high.

So does all this represent bad news for borrowers and good news for savers? According to some financial experts, things aren't quite that straightforward. Here's what they said when we asked them what impact higher inflation would have on our personal finances and what we should be doing about it.

1. Switch up your savings

Easy access accounts and emergency funds

Interest rates on both savings accounts and cash ISAs have been unappealingly low for some time now, and continue to be nowhere near the rate of inflation. This has meant that there's little to encourage savers to switch accounts to make their money work harder.

2. Rethink borrowing

Credit cards

Higher interest rates are bad news for borrowers. When it costs more for card companies to borrow, they pass this on through higher rates for customers. If you’re carrying balances for long periods and paying higher rates, consider how you can control these debts and pay them down. If you have a good credit rating, one option is to switch to a card with a 0% introductory period on balance transfer and make a foolproof plan to pay the balance off by the time interest becomes payable.

3. Pensions

Still working?

The advice is to keep doing what you’re doing. Save regularly into your pension and make sure you aren’t holding too much of your money in cash. Over the long run your investment returns should win over any periods of higher inflation.

About to retire?

You might need to juggle some of your plans, save a bit less for a few months, or put a pause on taking money from your pension for a short time. But be sure to review this regularly as your financial situation might change.

Retired?

With the scrapping of the earnings element of the state pension triple lock, pensioners reliant on the state pension will find themselves exposed to a rapidly rising inflation rate.

4. Household bills

Budgeting

It’s more important than ever to make sure you know what you're spending and live within your means. That means budgeting! Write down where the money goes – whether on an app or excel spreadsheet, and set up three columns: essentials, non-essentials, and luxuries. Make sure you're aware of the minimum you need every month to cover the direct debits, and don’t forget to review them, too. You need to be in a position where, if you have to reduce luxuries or non-essential by 20-30% because that money is needed in the essential column, you’ve got the financial flexibility to move it.

The grocery bill is probably the biggest area of your finances that you can influence. It’s about being a sensible shopper; having meal plans, buying things when they’re on offer to put in the freezer, then factoring them into the next week’s meals.