With energy prices and general inflation soaring, new research has suggested that many are turning to cash amid the current cost of living crisis. So why is cash king during times of uncertainty, and how can you improve your budgeting skills in the current climate? Let's explore.
What is happening with energy price rises?
On Friday 26 August Ofgem revealed its new energy price cap. The update means that, from October, a household with average energy usage will be facing bills of £3,549 per year. Plus, many analysts are suggesting things may get even worse, believing the cap could exceed £6,000 in a matter of months due to the rising cost of wholesale energy. If this does happen, it would take average monthly bills to £500 - simply unaffordable for many, especially for those already struggling.
For customers fearing price uncertainty, fixed energy deals may provide a solution. However, fixed deals are currently higher than the current price-capped rate, so opting for a fix is a gamble. To learn more about this, take a look at our article that explores the risks of fixing your energy deal.
What's the deal with inflation?
UK inflation been rising throughout the year. According to the ONS, UK inflation hit 10.1% in July, up from 9.4% in June. It doesn't look like inflation is set to cool any time soon either.
Despite the Bank of England increasing its base rate on numerous occasions this year, it's been suggested that inflation is likely to continue rising. Some have suggested it will go as high as 18% by next year, signifying the central bank's actions have been too little, too late.
So why is inflation so high right now? Well, many point to the bank's extensive quantitative easing programme during the Covid-19 pandemic as one of the biggest drivers behind the soaring inflation rate we see today today. The ongoing war in Ukraine is another big factor.
Whatever the exact reasons, we know that the Bank of England is a long way off its 2% annual inflation target.
To what extent are more people turning to cash?
Given the rocketing cost of living, new research has suggested many are turning to cash to help deal with managing their money. According to the Post Office , customers withdrew £801m in cash during July - the highest figure since records began five years ago.
Strikingly, this is 20% more than a year ago, and up 8% month-on-month. It should, however, be noted that a small proportion of this increase could be blamed on the closure of numerous bank branches and ATMs over the past year or so.
The Post Office has also revealed that £3.32bn in cash deposits were made at its branches in July. This was £100 higher than the previous month, suggesting much of the UK population is preparing in advance for the challenging financial times ahead.
How can you improve your budgeting techniques?
If you find it difficult to manage your money, there's nothing inherently wrong with keeping cash aside if it helps you budget. It may also be argued that using cash can make it easier to see the rate of your spending. After all, you're more likely to notice of a wad of £20s disappearing from your physical wallet at the end of the day as opposed to noticing the equivalent being spent on your debit or credit card.
In other words, if you find holding cash helps you budget, it can be a useful way of helping you cut back on your spending. However, it's best not to hold too much cash. That's because holding a lot of cash will mean you're missing out on earning interest on your money through a savings account. Also, you're unlikely to be covered if cash goes missing from your home - unless you've an expensive home insurance policy!
Other techniques to help you budget
Aside from keeping cash close to your person, here are 3 other ways to help you budget for the challenging times ahead:
1. Cut back on impulse purchases
Cutting back on unnecessary spending is often the first way to cut your expenses. Yet, it's fair to say that many have already done so, and still struggling. If that's you, the next step can be cutting back on any impulse purchases. For example, drafting a traditional shopping list for your weekly grocery shop can help you stick to a budget.
That's because having a list of items to buy may help avoid making any impulse purchases. While some short-term supermarket offers may appear tempting, if you're keen to stick to a budget, it's best not to be taken in.
2. Review your outgoings regularly
Keeping a close eye on your regular outgoings can be a great way of keeping track of your spending. This can include your weekly grocery bill, but also utility bills such as your mobile phone contract, insurance, plus monthly energy bill. Not only can this help you understand the exact figure of your outgoings, but it may also help you spot any errors or mistakes.
Plus, checking your outgoings regularly may also give you some motivation to cut back on any unused subscriptions. Paying for a music subscription you rarely use? Consider ditching it for the sake of your wallet.
3. Consider using budgeting apps
While using physical banknotes may help you budget, it's worth knowing that there are a number of nifty apps out there that can help you track your spending. Two specialist budgeting apps include Chip and Plum, which can both help you keep track of your spending. Both also have a feature that helps you put aside 'spare' cash that you don't spend.
If you don't want to sign up for a specialist budgeting app, then consider using any budgeting features in your existing bank account's app. A number of banking mobile apps, including the big-name banks - have useful insights on your monthly spending. Features such as these can be a godsend if you aren't sure where your money is going each month.
Still struggling? Look at these options too...
Sadly, even with all the budgeting help in the world, many are likely to struggle this year, especially from October, when the cost of energy is set to surge. If you're worried your bank account is likely to go into the red, it's worth taking a look at our best bank accounts guide to explore accounts that offer a 0% overdraft. Having a 0% overdraft can give you some respite from having to pay interest if your balance temporarily falls below zero.
Also be mindful that if you find you simply cannot make bill repayments, it's worth speaking to your provider as soon as possible. They may be able to organise a repayment plan for you.