Saving pence will spare financial pain of credit crunch

Last updated 21:16, Saturday, 05 July 2008

Inflation recently jumped to its highest level in 10 years. The Governor of the Bank of England, Mervyn King, has indicated that it is likely to rise even further and made it clear that – if pay deals increase – he will respond by increasing interest rates to avoid further inflation.

If inflation rises by one per cent more than income, someone earning £25,000 a year would be approximately £15 a month worse off in real terms. For many people, this will be the first time they have entered a period where they will effectively be earning less. So, while it isn’t easy, here are a few simple steps that may help to get you through the next 12 months without too much pain.

Pay off the plastic

Money being tight is no reason to cut up your credit cards. They provide a flexible way to borrow and are great for tiding you over for a few days. By taking advantage of the interest-free period between their purchase and the bill payment, credit card users save more than £12 billion a year.

However, with APRs in the region of 16 per cent, they are also one of the most expensive means of long-term borrowing and you need to use them smartly. Try not to carry a balance on your credit card and, if you do have a large balance, consider switching to a card which offers 0 per cent on balance transfers for long enough to reduce this to a more manageable level.

Review the non-essentials

Most people have enjoyed a steady increase in disposable income over the last 10 years. We have become used to buying what we want, when we want it, and low interest rates have made it easier to spread the cost over a longer period. You could save hundreds of pounds a year by simply cutting out non-essential purchases.

Consider whether luxury items you are thinking of buying, or renting, are really necessary. Do you get value for money from the satellite box sitting in the corner, or could you switch to a free digital service – even for a limited period?

The weekly food shop is an easy area to save money. Britons waste a third of the food they buy, so shopping more wisely, writing a shopping list, using leftovers and freezing spare food can save you a huge amount.

Dust off the bike

With the cost of filling a typical car approaching £60, it is time to seriously consider the alternatives. While the rural make-up of our region means that you may be dependent on the car, could you cycle or even walk to work?

If not, do you know anyone who would agree to car share – even if this is only for one or two days a week? As well as reducing your petrol bills, if you are travelling into a town centre it could save another £5 a day on parking costs.

Plan ahead

One of the main impacts of the credit crunch has been the increase in mortgage rates. If your current mortgage is due to expire over the next six months, don’t wait until your monthly payment goes up before considering what to do. Start discussing your requirements with your current lender and other mortgage providers two or three months before your current deal expires.

If you have previously used a broker, it is worth bearing in mind that – since the credit crunch – many lenders now restrict their best mortgage deals to their own branches.

Make your money work for you

Many banks happily take your wages each month but give very little back. If you keep money in your current account, check that it is earning interest. If you use an overdraft regularly, check that it is costing you as little as possible.

If you have savings that you can lock away for a longer period of time, now is a good time to review whether you are getting the best possible rate.

The flip side of the credit crunch is that fixed rate savings accounts – and the best tax-free ISAs – are now paying over 6.0 per cent.

Chris McDonald is head of marketing at the Cumberland Building Society. This article should not be relied upon when making investment decisions. Always obtain financial advice.