Future Proof Your Finances
With the increased interest rate last year – from 0.5 to 0.75% – and continued Brexit uncertainty, now may be an ideal time to future-proof your finances, preparing, if not hoping for, the worst-case scenario. Stress testing is something which the government historically asked of banks and financial institutions, in order to plan and prepare for future financial strain, and it’s something experts have recommended households now plan to do themselves. Preparing for potential increases in expenses, from mortgage repayments to utility and food shopping, can help you stay on top of money matters if things do get more expensive. We explain more below.
Before forecasting ahead, get a good grasp of your finances at present. Find a good budget planner online or enquire at work on whether they offer one to employees. An interest rate rise is a good prompt for you to take stock and work out whether you can still afford your monthly or annual expenditure as it is at present. If not, find the gaps and make an action plan of how you can save or better manage your expenditure – cutting out the unnecessary and looking into switching providers to get better deals. Budgeting tips:
- First total up all your necessary monthly costs – your mortgage/rent, council tax, bills and direct debits.
- Then work out an average of the more fluid expenditure such as food, commuting costs and clothes etc.
- Then look at your incoming funds, your monthly wage or, if this various per month due to being self-employed, take an average of the past 6 months.
- Finally, work out the difference. If you find you are left with extra as disposable income make sure it’s enough and gives you slack if prices do rise. If you have very little extra and often use credit cards and loans to make up the difference, take another look at your expenditure and see where you can cut costs, giving you more comfortable room.
Keep savvy about interest rates
You might presume that increased interest rates, that can potentially make repayments on loans and mortgages more expensive, will be offset by the increased interest you will make via your savings – in savings accounts, ISAs and pensions. However, banks will not necessarily offer the same back to even the scales, so relying on earning more on savings will generally not be as important as making sure your budget is watertight and being on top of any changes to your mortgage terms.
Forecasting and fixed rates
Although a rise of 0.25% is minimal for most households, many forecast this to rise in the future to perhaps as much as 2 or 3%. If your mortgage terms are nearing renewal, it’s vital to look into your options now and understand what a rise in the base rate could mean for your monthly repayments. If finances are tight now, you find you can’t re-mortgage on the same terms and get stuck on your banks standard variable rate, trying to find another £150-£300 for something as essential as your mortgage could tip finances over the edge. It therefore makes sense to take the lead from the many homeowners who are looking to fix their payments on some of the decent fixed rate deals that are available at present, meaning that your payments will remain the same for two, three, five or ten years, depending on the terms.
Avoid financial over-stretch
Preparing for the worst can certainly make things seem all doom and gloom! It is worth bearing in mind that interest rates will unlikely spike suddenly, but creep up over time, meaning less of a shock to household expenditure. The main takeaway is to aim to manage your expenses as best possible and give yourself financial slack so you can comfortably afford all essentials, have a good quality of life and still absorb potential financial increases in the future. Getting into these habits now, in a relative period of calm, is especially important when experts predict gradual increases further down the line.