Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

THE assault on household finances in 2022 now has several fronts, with prices in practically all areas of our spending rising, and rising most quickly for essential spending like fuel, energy and food that cannot be avoided.

You can add to that an extra 1.25% of National Insurance payable from April, frozen Income Tax bands that will drag more people into higher rates of tax and the likelihood of further interest rate rises that will make debt more costly.

But I’m not going to take it lying down. Here’s my plan to fight the cost of living squeeze in 2022.

Working out the cost

It’s easy to spot rising prices on some items, and less easy on others. If you’re a driver, I’ll bet you have a pretty accurate idea of how much it costs to fill your tank at the usual station. When that price goes up, you notice it straightaway.
With energy bills, too, you can see the amounts being taken in direct debits going up.

It can be less obvious on spending that is less regular. I need to buy a new hoover but I wouldn’t be able to tell you if I’ll be paying much more than I would’ve done a year ago (although I’m sure I will be).

In reality, you don’t need to be a forensic accountant to take a stab at how much extra you’re forking out. Just take stock of your past few bank statements and you’ll be able to see if money is beginning to get a bit tight, and by how much.

I reckon I’m spending already around £50-£80 more a month on regular essentials like food, energy and fuel. Thanks to the recent rise in interest rates - and the fact I’m in the minority of borrowers on a tracker rate mortgage - my repayments have also risen by about £20. That’s likely to rise even more this year and if the predicted rise in the Bank of England rate to 1.25% happens this year.

For now, I’m working on the basis that I need to trim around £100 a month of spending if I can in order to keep on an even keel this year.

Finding savings

The trick to budgeting is to cut back on things that require little or no sacrifice if you can. For example, an easy win is to forgo things like a new mobile phone - involving an expensive new contract - and opt for a cheaper sim-only deal. Luckily my contract is up and I can make that change. I’ll live with my old (but not that old) phone for a while longer.

I’ve also identified a number of ongoing subscriptions that I’ve signed up to over the past couple of years that, truth be told, I get little value from. There’s at least one TV streaming service that can go and perhaps a couple of paid-for podcast subscriptions that may also have to bite the dust.

Taken together, I think about half my £100 target savings can be achieved through these relatively pain-free savings.

Beyond that, however, I’m going to have to actively decide to cut back. I’ll be cooking more at home and looking for some low-cost entertainment with friends.

Fighting the long-term effects of inflation

Higher prices don’t only hurt your finances in the short term. They also erode the value of your savings over time and make it harder for any assets you own to hold their value.

The effect is particularly acute on cash savings, where returns are likely to be low, and long way behind the current 5.4% rate of inflation. It’s forced me to reassess whether I should reallocate some money that I currently hold in cash to investments, where there is at least a chance they can grow enough to match inflation.

There are some important caveats to this.

  • Firstly, I still need enough in cash to give me cover in an emergency. Having cash savings on hand worth between three-to-six months of outgoings is strongly recommended before you turn to investments, where there is a risk your money will lose value in cash terms. By having this cash you’ll be far less likely to need to sell investments in a pinch, which can often be the worst time to sell.
  • Secondly, investing means taking more risk. I’ll invest in the hope that my assets can grow at least as fast as inflation, but I’m fully aware that may not happen.

So, that’s my inflation-fighting plan. With price rises forecast to increase even further before easing back, I may need to revise and take even tougher measures as the year unfolds. But by acting now I’ll have at least made a start.