How much is your complacency costing you? Review your finances and you could be hundreds of pounds better off.
Soaring food, energy and petrol prices are having a dramatic impact on household budgets, as families struggle to deal with the higher cost of living.
These price rises are easily outpacing any increases in earnings, which means disposable income – the money left after paying tax and essential bills – is falling.
According to the latest Income Tracker Survey from Asda, family spending power has fallen again for the sixth consecutive month, as the average UK household now has £171 a week of discretionary income, down from £178 this time last year.
Budgets stretched to breaking point
But with inflation at 4.5 per cent and the average instant-access account paying just 0.89 per cent, households are having to find other ways to manage their finances to cope with the high cost of living.
At the same time, it’s a year since chancellor George Osborne announced the VAT rise from 17.5 per cent to 20 per cent which came into effect at the start of 2011 – putting further pressure on household budgets.
While you may feel helpless watching your family finances get squeezed from all sides, you can’t afford to sit back and do nothing, as complacency could be costing you dear.
Now is the time to put your finances in order.
Review your finances
The good news is, households may be able to free up some cash simply by sitting down and working through all their outgoings.
As well as day-to-day spending on items such as groceries and petrol, it’s also worth looking at some of the bigger costs, such as energy bills, home and car insurance, as well as financial products, such as credit cards, savings accounts and mortgage.
Case study
James Potter, 34, and his wife, Naomi, 29, who live in a three-bed barn conversion in Wacton, Norfolk, with their one-year-old daughter, Emily, say their household finances have been squeezed by the higher cost of living – and especially by the rising cost of food and fuel.
The couple do try to keep their finances in check, and saved hard before having a baby, but found this pot soon got depleted very quickly once Emily came along. James works in marketing and Naomi is a solicitor.
While things have eased a little since Naomi went back to work, the Potters are keen to reduce their outgoings.
Keep a lid on energy costs
Gas and electricity prices are rocketing, and now that Scottish Power has announced that it is putting up prices in August, other firms are expected to follow suit – making it vital to ensure you’re on a competitive deal.
The Potters currently spend £40 a month on electricity on standard tariff with npower which they pay monthly by direct debit.
However, they could save £125 on their annual spend of £480 simply by switching to a different npower tariff – Sign Online 22 which would cost just under £30 per month. This is a discounted tariff which is 2 per cent lower than their standard tariff until 30 June 2012.
Other tips include taking regular meter readings to make sure you’re not overpaying, fitting energy-efficient devices, and turning appliances off standby.
Cut the cost of cover
A simple way to reduce insurance costs is by shopping around for the best deal, as providers typically reserve their most competitive deals for new customers.
The Potters own two cars, and it costs them around £25 a month, or £300 a year, to insure the family car with Tesco, and around £35 a month, or £420 a year, to insure the sporty car with Swiftcover.
The Potters could reduce the annual cost of insuring the family car to £221 by switching to Swiftcover, and reduce the cost of insuring the sporty car to £331 by switching to Axa.
They could also bring costs down by paying their premium up front in one go, and parking in a driveway or garage.
The Potters currently pay £30 a month for a combined buildings and contents policy with the Co-op.Once again, when it comes to home insurance, firms rely on apathy, so it’s well worth a few clicks of your computer mouse to find the same cover cheaper than your renewal quote.
Get a good deal on your mortgage
As the mortgage tends to be the biggest monthly outgoing for most households, you may be able to make savings by remortgaging to a better deal.
If you’re happy about being able to absorb some extra costs when rates rise, you could look to a tracker, but if you want peace of mind you’d be better off opting for a fix.
The Potters remortgaged earlier this year, and are currently on a tracker with the Co-op at a rate of 3.7 per cent.
However, according to broker London & Country, the Potters could potentially make a saving of £90.58 per month, or £1,087 per year by switching to a new variable rate of 2.5 per cent with ING Direct.
Alternatively, if they want the security of a fix, they could save £49.77 per month or £297.24 per year by switching to a two-year fix with Market Harborough at 3.05 per cent.
That said, before switching again, they do need to check the terms and conditions of their current deal, as having already remortgaged earlier this year, they may well be tied in with early repayment charges.
If so, they may be better off staying put for now, and then reviewing their deal a few months before it ends.
Play your cards right
Credit cards can leave you burdened with debt for years, making it vital that you take control.
The Potters are disciplined with their plastic, and only use their Lloyds TSB purchase credit card for emergencies; this card comes with an annual percentage rate (APR) of 15.9 per cent.
If they aren’t looking to spend, and have no existing balance, they could get something back from their shopping with a rewards credit card; the AMEX platinum cashback card, for example, offers up to 5 per cent cashback for the first 3 months, then up to 1.25 per cent after that, with no limit on how much you earn – or how you spend it.
Crucially, to maximise any benefit they will need to clear their whole balance in full each month.
Elsewhere, both the Tesco Clubcard Credit card and Sainsbury’s credit card also offer shopping reward points.
For those who are looking to reduce the interest they pay on their plastic, Virgin Money is currently offering 19 months interest-free on its balance transfer card.
Check savings rates
While savings rates may be languishing at rock bottom, getting the best possible return will put more into your household budget.
The Potters don’t have a lot in savings since having a baby, but are trying to build up an emergency fund in an individual savings account (ISA) with Lloyds TSB, paying a rate of 2.65 per cent.
An ISA is a good way to save, as it lets you build tax free interest on your savings; to maximise the benefit, you should try to use your full annual allowance, currently £5,340 in cash.
You can earn more interest if you are willing to lock your money away in a fixed-term ISA or bond, but if you are likely to need access to your cash then an instant-access account could be a better option.
At present, you can get 3.05 per cent with the Nationwide My Save account if you deposit over £1,000, or 3 per cent on balances from as little as £1 with Santander and ING Direct.
Reduce motoring costs
As the Potter family have two cars, they end up spending around £80 a week on petrol, but could combat rising fuel costs by getting their cars regularly serviced to maintain engine efficiency, and ensuring tyres are well-inflated. Further savings could be made by lift-sharing, and using a site such as www.petrolprices.com to find the cheapest local petrol before filling up the tank.
Shave money off shopping bills
The Potters also spend a lot of money on food, but could save by swapping their regular supermarket for cheaper one, and by comparing prices on a website such as http://www.mysupermarket.co.uk.
Further savings can be made by cutting down on luxuries such as expensive ready-made sandwiches and coffees, and by cancelling gym membership and monthly magazine subscriptions they no longer use.
Take action
By taking just a little time to review their household bills and financial products, the Potter family have been able to save hundreds of pounds over the course of a year.
So don’t delay: now is the time to review your outgoings to find out where you can get better value and free up vital cash.
