Managing finances in a time of turbulence

Managing finances in turbulence
  • Financial education
  • 4 minute read

Right now, the need for people to have access to reliable and reputable financial education and advice has never been more acute.

In January 2022, the rate of inflation in the UK hit 5.4% – the highest it has been for 30 years. To control it, the Bank of England has raised interest rates. At the same time, we’re seeing costs rising across the board, but particularly in the squeezed energy markets.

Individually, these events make for compelling headlines, but to understand the true implications they have for financial wellbeing and their impact on savings, pensions and the cost of living, it’s important to look at them together.

While non-specialist media tends to treat them as distinctly different topics, it is the collective relationship between the three that amplifies the effect they each have on our finances.

Inflation, interest and investments

The Covid-19 pandemic and Brexit have both contributed significantly to a rise in the cost of goods; compromising production and supply chains, creating demand that outstrips supply and inflating prices.

Increasing prices, in turn, drive inflation. A little inflation – what economists might call normal (and in the UK, that’s generally accepted to be below 2%) can be healthy because it promotes growth and encourages further investment in the economy.

But the levels we’re currently seeing are concerning for several reasons, not the least of which is that salaries can’t keep pace with them, which in the end means that individuals are feeling the pinch, as their money doesn’t go as far as it did before.

Raising and lowering interest rates are common mechanisms used by the Bank of England to control inflation but, like inflation, they also need to be controlled. On the one hand, high interest rates give investors the opportunity for higher returns on their cash, but on the other they increase the cost of borrowing, which risks suppressing economic growth. So finding the right balance is key.

Managing uncertainty

Inflation has already exceeded the 4% forecast by the central bank last summer. It currently estimates that inflation will peak at 6% during the spring and will start to come down in the second half of the calendar year and throughout 2023.

However, no one is predicting when the rate of inflation is likely to near the bank’s 2% target. Most economists believe it will be 2024 or beyond before it reaches what the Bank of England might consider an acceptable level.

In the meantime, people are already feeling the squeeze, and they need help to make sense of their finances and to make better-informed financial decisions, both for now and for their longer-term needs.

For most people, the economic factors that will influence their personal financial circumstances now and in the future are confusing. It’s hard to develop an understanding of the strategies that could help them address those factors. In some scenarios, longer-term strategies may be more beneficial; in others, financial decisions that deliver benefits over a shorter period may prove more effective.

That’s why it’s more important than ever that people have access to reliable, robust and reputable financial education. This will help people to build their confidence and resilience, and equip them to plan for a future where they can achieve their personal goals – and financial security.

 

To find out how Close Brothers can help your company improve the financial wellbeing of your employees, call us on 0800 028 0208

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