Skip to content

How to protect your finances from inflation

published: 04 May 2022
Read time: 5 minutes

Feeling the squeeze? Make sure your finances are tough enough to cope with the pressure

Inflation is rising at record levels and that means the Bank of England has had to increase interest rates (the Bank Rate) as a way of managing the situation.

But while higher rates are great news for savers - it's worrying for borrowers, particularly those on a variable rate or tracker mortgage, for example.

As households are being squeezed, now is the time to take stock and look to shelter your finances from rising rates, while savers can benefit by bagging the best paying savings accounts.

Read our top tips on how to best manage your finances in 2022...

Move savings to the highest rates you can find

In recent weeks, we’ve seen signs of improvement in the savings market, but right now, it’s hard to find a standard account which can beat the eroding power of inflation.

If you’ve got money squirreled away, the best approach is to shop around to seek out the very best rates you can.

Some of the top rates are on fixed-rate bonds, but to get the very best rates you'll need to be prepared to lock your money away for three or five years, for example. 

The problem with tying your money up for too long is that any increase in the base rate could translate into higher rates in this market.

One compromise might be to fix for just a year. At the end of this period, there’s a good chance rates will be higher for when you’re ready to fix again.

When interest rates rise variable-rate savings accounts are usually the first to see rate increases, but be wary about waiting for this to happen, as some banks may be slow to pass on the increase. Some providers may decide not to pass on the increases at all. It’s worth checking for the best deals now and making a switch.

Consider investing, but beware of the risks

If you’re looking for better returns, you might be giving some thought to investing.

But you need to tread very carefully, as it does come with some risks.

While a stocks and shares ISA (where you can hold investments free from tax) offers the potential for more attractive returns, investing can be volatile on a day-to-day basis.

You need to research carefully so you understand what you’re getting into - or ideally seek independent financial advice. 

You also need to be prepared to take a long-term view – investing for a minimum of five years, for example, to give your cash the best chance to grow. And always remember investing in equities carries risk.

Woman leaning on counter checking bills

Pay down debts

Most consumer borrowing is fixed, and while credit card costs can go up, they are not necessarily linked to the Bank of England’s decision. That said, it’s prudent to be braced for higher costs, and especially if the rate charged by lenders is variable.

If you have debts on cards, personal loans or an overdraft, work hard to pay these down now while rates are low.

List out all your debts, from the most expensive to the cheapest, and prioritise paying off the most costly one, before moving down the list. But always check for any penalties first.

Choose the right type of borrowing

If you’re looking to consolidate your debts into better deals, the right option will depend on how much debt you have, and the rates you’re currently paying.

If you have debts on a number of cards, you may find that switching to a card charging 0% on balance transfers makes good sense. Some providers are currently offering more than two and a half years interest-free. But remember you need to clear what you owe before the 0% deal comes to an end, or interest charges could rocket.

Alternatively, switching to a low-rate loan could give you the certainty you need amid the prospect of rising interest.

Switch to a fixed-rate mortgage

If you’re looking to remortgage in the near future, you should consider comparing deals and securing a fixed rate now. Rising interest rates impact on the mortgage rates in the market - and the market leading fixed rates are being pulled from the market all the time.

As mortgage deals are often valid for a number of months, it makes sense to start searching for a fix sooner rather than later.

Overpay your mortgage

Mortgage rates are still historically low (although they are now rising) so it is a good time to see if you can make overpayments - if at all possible. This approach could save you a substantial amount in interest charges over the life of your home loan.

Typically, lenders will allow you to overpay up to 10% of your remaining balance each year on your home loan without facing a penalty, but check the specific terms of your mortgage or call your lender if you're unsure.

As an added incentive, if you overpay, you may be able to get a more competitive deal when you come to remortgage, as your balance will be lower.

More tips

  • Make sure you’ve got an emergency fund, if possible as large, unexpected bills can pile on the pain

  • Find ways to lower day-to-day living costs. Shop around for bills and outgoings. Cancel subscriptions for goods or services you no longer need or use

  • When food shopping, make use of deals, offers, vouchers and loyalty schemes. Try down-shifting to a cheaper supermarket, or to cheaper brands

  • Save on petrol costs by finding the cheapest fuel locally at PetrolPrices

  • Put some simple energy-saving measures in place. Check around your home to see how you can boost insulation, with things like simple draft excluders for your doors and lagging for your pipes. Switch your light-bulbs to efficient LED bulbs

  • See if you're eligible for the Warm Home Discount and other help with heating costs