This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
There is no shirking the matter. Since the UK’s cost of living crisis escalated in 2022, families have found it harder to put money aside.
Investment levels were at a 3-year low in July 2022, and in May 2023 savers took out a record £4.6bn from savings as consumers struggled to meet their monthly bills.
This behaviour is understandable but also concerning. Without easy-access savings to shore you up in an emergency, you leave yourself more vulnerable to a sudden expense (e.g. repairing a broken boiler).
If people are not building up their net worth by setting money aside for investments – e.g. in a pension – then they risk undermining their long-term goals, such as a comfortable retirement.
In this guide, our financial planners explore how people in Burnley, Lancashire and further afield can continue to set money aside for savings and investments during a cost of living crisis.
Why stopping is usually a bad idea
When people stop saving and investing it is typically difficult for them to start up again.
This is because a different mindset is needed to restart contributions compared to increasing them. With the latter, you might already have a decent amount of money in your account which motivates you to build upon it.
For the former, you might be starting from £0 and it is harder to see the reward of, say, adding £50 to your account each month. Here, it can help to keep your savings out of sight – in a separate account where you are not easily tempted to transfer it back to your current account.
Saving money and investing requires self-discipline. Nobody is there to “force” you to do it. If you can keep up the habit during harder economic times, you are more likely to continue when conditions improve.
If you are really struggling, consider speaking with a professional about reducing monthly contributions – for a time – rather than stopping them entirely. This helps to maintain a positive feedback loop of establishing a goal and attaining it.
Why your pension still matters
26% of large businesses in the UK have reported rising numbers of employees opting out of their workplace pensions to try and cope with the cost of living crisis.
As a general rule, stopping your pension contributions – or opting out of your scheme – is a bad idea. Firstly, you risk losing the “free” pension contribution from your employer, which stands at a minimum of 3% in 2023-24.
Some employers match their workers’ contributions (e.g. 10% for 10%), and losing that would be a big blow to your pension fund. Certain professions offer a very generous employer contribution – e.g. the teacher’s pension scheme (23.68%) – and this should not be given up lightly.
Secondly, you stand to lose out on the power of compound interest on your pension savings. For instance, suppose you put £5,000 into your pension in a given year.
After 12 months it grows by 6% to reach £5,300. The next year, this £5,300 grows by another 6% to reach £5,618. If this pattern continues over 20 years, the £5,000 investment could turn into £16,551.02.
However, if this individual decided to opt out of their pension and not put this £5,000 into their pension, they would miss out on this potential growth in their retirement fund.
As much as your immediate financial needs might feel the most pressing, be careful about stopping your pension contributions. Speak with a financial adviser if you are considering this option, as there may be better ways to balance your short and long-term financial goals.
Be careful not to assume that you can simply rely on your State Pension for retirement. In 2023-24, the full new State Pension stands at £203.85 per week (£10,600.20 per year). Whilst this is certainly an important source of retirement income for many people, it will typically not be enough to cover all of retired individuals’ expenses.
How to invest when money is tight
It is usually best to start with your goals – separating them into short, mid and long-term. Then, consider the importance and urgency of each one. Going through this process with a financial adviser will help you do this in an objective fashion.
For instance, a short-term goal might be to build up your emergency fund to hold 3 months’ worth of living costs. A long-term goal could be to invest £200 per month into your pension to reach your target retirement fund.
Can you afford to compromise on either of these goals? Perhaps you may need to reexamine your contribution levels in light of your immediate expenses. However, discarding either goal entirely will likely be unwise.
As soon as you have identified your financial priorities in your mind, it is time to plan your budget accordingly. This might involve optimising your tax plan or cutting back on certain discretionary expenses, freeing up more income to commit towards your financial goals.
Automating your savings and investments – also, possibly setting them up to go out at the beginning of the month – will help you to stay committed and not break the habit.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
