With inflation expected to reach 13% by the end of the year and yearly energy expenses approaching £5,000, we will all need our money to work harder to keep us afloat.
The good news is that there are many methods to utilize your money to combat the cost-of-living issue, ranging from raising your rates to producing your own power.
Despite growing interest rates, many of us still have money in accounts paying close to nothing.
More than £30 billion is sitting in accounts yielding 0.1 percent or less in yearly interest.
Zopa’s Smart Saver offers the greatest instant-access savings rate of 1.81 percent.
If you deposit £10,000 from a 0.1 percent account, your yearly interest rises from £10 to £181.
Protect your funds from taxation.
Every tax year, all basic-rate taxpayers may earn up to £1,000 in tax-free interest on their savings (April 6 to April 5 the following year).
Because of historically low savings rates, earning more than £1,000 per year in interest looked improbable in previous years.
However, with interest rates on the increase, it is becoming more possible for individuals with sizable savings pools.
For example, if you had £30,000 in the highest-paying savings account – 3.5% on a five-year fixed-rate savings bond with Aldermore – you would exceed the £1,000 threshold and lose some money to the taxman.
For higher-rate taxpayers, the limit is reduced to £500, thus £15,000 would earn more than your allowance in Aldermore’s account. You may prevent this issue by transferring your funds to an Individual Savings Account (Isa). The one-year fixed-rate cash Isa from Shawbrook Bank offers 2.37 percent interest.
Interest rates on Isas lag behind those on regular savings accounts, so only transfer money that is subject to tax.
Pay off credit card debts
Credit card interest rates are at a 24-year high, so if you have a debt, utilize your funds to pay it off. It will save you considerably more money than the interest you might collect on your savings.
For example, if you owe £1,000 on a credit card with a 21.66% interest rate and pay just £50 a month, it will take you until September 2024 to pay it off. In all, you will pay £222 in interest.
Over the same time period, the equivalent money in the best savings account would yield just £36.
Mortgage overpayment
Many homeowners, particularly those with variable rate mortgages, are going to be stung, with mortgage payments expected to climb by hundreds of pounds each year as interest rates rise.
Overpaying your mortgage is one strategy to offset this.
‘Overpaying will result in a smaller mortgage to manage, and it may also lessen the total loan-to-value to assist extend your options when remortgaging,’ explains David Hollingworth of broker L&C Mortgages.
A £10,000 prepayment on a £200,000 mortgage with a 3% interest rate and 20 years remaining on the term, for example, would save a homeowner £7,866 in interest over the life of the mortgage and settle the debt more than a year early.
Check the terms of your loan first; some lenders restrict the amount you may overspend before incurring an early repayment fee.
Use your savings to pay down your mortgage.
If you enjoy the notion of overpaying but are concerned about committing financial savings at a time when expenses are rising, an offset mortgage may be worth looking into.
When calculating loan interest, the amount of the linked savings account is subtracted from what you owe on the mortgage.
So you pay less interest on your mortgage while still having access to your savings.
If you placed £10,000 in a savings account connected to a £200,000 offset mortgage with a 3.15 percent interest rate, you would save £270 in interest over two years compared to putting the same amount in the best savings account and a normal mortgage with a 3.15 percent interest rate.
Purchase solar panels
One long-term solution to rising energy expenses might be to leverage your money to purchase solar panels.
Until last year, it took around 11 years to repay the cost of solar panel installation. However, when the cost of power rises, so are the savings provided by solar panels.
According to comparison website Uswitch, depending on bill projections, you may return your installation expenses in slightly over two and a half years.
According to the Energy Savings Trust, the average installation cost is £6,500. According to Uswitch calculations based on expected energy costs for next year, the same family could save £2,043 on their yearly energy payments.
Prepare for winter right now.
Improving your home’s energy efficiency is another less expensive approach to leverage your savings to reduce growing energy costs.
According to government statistics, over 30% of British houses with cavity walls do not have insulation.
Cavity wall insulation costs about £1,200 to install, but it might save you £285 per year on your energy expenses.
Draught-proofing your property costs about £240. According to the Energy Savings Trust, a professional will block any draughts around windows, doors, skirting boards, and floors and may save you £95 per year on average.
Invest in energy companies
How about taking advantage of the record profits made by energy companies? BP posted earnings of £6.9 billion in the first three months of the year earlier this month, more than double what the company earned in the same time last year.
‘While dividend distributions on investments in energy and utility companies may be able to cover part of the rise in your costs, it is far from a fail-safe approach,’ explains Rebecca O’Connor, head of pensions and savings at wealth management Interactive Investor.
BP shares now provide a dividend yield of 4.08 percent per year to investors.
So a £10,000 investment may yield £408 each year. Alternatively, Eon shares offer a comparable dividend yield of 5.49 percent, so a £10,000 investment might result in a £549 payout over the following year.
‘Putting all your your eggs in one basket, especially a volatile basket, puts your cash at danger,’ warns O’Connor. You must decide if the relatively constant returns on offer are worth the danger to your wealth.’