Making your money work harder to combat the rise of living costs

Everything just feels a little bit out of control right now. Prices of everyday essentials are rapidly increasing everywhere. Household gas and electricity prices are rising at an alarming rate, prompting the UK government to provide a £400 rebate to each household and petrol and food prices have increased sharply over the past few months too.

For many of us, understanding the reasons why we’re in this situation and what, if anything, we can do about it, could help us regain some control over the situation. Planning gives you the ability to think through things at your own pace and feel more prepared for what may come. As former US President Eisenhower famously once said, “Plans are nothing; planning is everything”.

A perfect storm?

The reopening of the world economy after a succession of lockdowns has led to disruptions within the supply chain. For businesses everywhere, ramping up production is far more cumbersome than closing it down: a lack of supply combined with a surge in global demand has caused an increase in prices for both businesses and consumers.

As you might imagine, the conflict in Ukraine has exacerbated these effects. Russia has restricted its supply of oil and gas and Ukraine is struggling to export a significant amount of basic foodstuffs that supply the world food network because its Black Sea ports are blocked by Russia.  

And don’t forget inflation

We are all acutely aware that inflation at its current level has not been seen for a generation. The challenge that central banks now face is to bring it back under control and much closer to the desired 2% level without damaging the economy in the process.

The main lever at their disposal is the setting of interest rates. By increasing these, the Bank of England hopes to encourage people to save rather than to borrow and spend, slowing the economy as a result. For those of us who have loans or mortgages, this will increase our repayments, unless they’ve been fixed at a specific rate in advance. On the other hand, those of us with cash savings may be able to seek out better rates for our savings.

Time to put your money to work?

Inflation erodes the value of savings – if the prices of goods and services is increasing, your money ultimately buys you less. But while adopting a ‘watch and wait’ strategy might feel like a reasonable approach right now, one of the worst things to do when facing this scenario is nothing at all. Seeking out the best savings rates is important, but this alone may not be enough to keep your long-term financial goals on track. This is why planning effectively for your future is so important. This is where investing can help.

Taking action

While we’re in such extraordinary times, it might not feel like the right time to start investing. But the truth is there is no such thing as the ‘right’ time.

Stockmarkets go up and down all the time, and while this volatility might seem daunting, some of this risk can be offset by dripping your money in gradually, month after month, for example. With many investment providers it’s possible to invest with smaller, monthly contributions over a period of time, giving your investment time to grow without impacting your monthly budget too much either.

Investing is a long-term proposition. Over time your investments should have the potential to grow, meaning you’re more likely to weather periods of volatility as your savings will have more time to recover from any dips in value. But of course it is important to remember that the value and income from stockmarkets will go down as well as up, and the value of your investment may fall as well as rise so you may get back less than you originally invested.

Planning to spread the risk?

Diversification is another key factor in managing the risks of investing. By spreading your money between different types of assets that tend to perform well in different market conditions - like equities and bonds for example - you can help to cushion yourself against heavy losses should one asset dip in performance. On the other hand you could also enjoy the rewards should one asset outperform the market too.

Putting your money into ‘active’ funds can often help manage risk too. Managers of actively managed funds are ‘hands-on’ in managing your money, with the freedom to make informed decisions on your behalf. Fund managers spend their time researching the markets and keeping abreast of the financial news, so by investing in their funds you are also harnessing their knowledge.

Greater risks in these types of funds tend to come with greater potential rewards, so it’s important to get the balance right and make sure you choose the right investment for you. Generally, the longer you are invested the more risk you can potentially take, as the effects of time could even out the ups and downs along the way.

Planning to make more of your money

Investments in the stockmarket have the potential to outperform savings rates, especially over the long term. However it’s worth remembering that up to £85,000 of your money is secure through the Financial Services Compensation Scheme, unlike a stocks and shares investment where your capital is of course at risk.

By investing bit-by-bit every month you can help to smooth out any volatility, with your money buying a greater number of securities when markets are down. And by investing over a long-term period, you could enjoy the rewards in the times when the markets do rise.

Whilst day-to-day price rises are eating away at your spending power today, it is important to not lose sight of the importance of planning for your long-term financial future. Savings rates are not keeping pace with inflation. But by putting some of your money away into investment, you can help soften the blow of the current situation and keep your future spending power on course.

Please bear in mind that M&G Investments are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. The views expressed here should not be taken as a recommendation, advice or forecast.

The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.