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Savings crisis will hit average earners thanks to rising prices

Average earners are set for a savings crisis over the next year as rising prices force many to spend pots they potentially accumulated over lockdown.

Only the richest 10 per cent of households are likely to add to their savings over the next 12 months, the study by Hargreaves Lansdown and Oxford Economics suggests.

Meanwhile, middle income households in general will see the biggest hit to savings pots of any income group.

Breaking the bank: Average earners are set to face a savings crisis over the next 12 months, as rising prices force them to spend their way through their lockdown savings.

At present, 56 per cent of middle income households – those with average household earnings of £31,800 after tax – have enough savings, but within a year this will fall to 48 per cent, according to the research.

Enough savings is defined as the recommended emergency savings safety net of at least three months’ worth of essential expenses.

Those at the bottom end of the middle fifth of earners will see the biggest hit to their savings, according to Hargreaves Lansdown. 

One year from now, the number of these households with enough savings in the bank will have fallen from 52 per cent to 42 per cent.

The research chimes with the latest data from the Bank of England, which suggests the amount Britons are saving is falling.

The combined net flow of savings into both savings and NS&I accounts in June was £1.9billion, down from £5.6billion in May. 

This also sits well below the average monthly net flow of £4.7billion a month seen during the 12-month pre-pandemic period up to February 2020.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: ‘It doesn’t mean average earners will face bigger challenges than those on lower incomes, but savings are their Achilles’ Heel.

‘The proportion of the middle earners with enough savings to be resilient will dip below 50 per cent over the next 12 months.’

The picture is even worse for lower earners. Only 30 per cent of the lowest fifth of earners have enough savings now, and only 24 per cent will have enough in a year’s time, according to the research.

Those with no savings to fall back on, earn less than average, but who aren’t on very low incomes are likely to borrow more through things like credit cards and loans in order to make ends meet.

The proportion of the middle earners with enough savings to be resilient will dip below 50 per cent over the next 12 months.

The proportion of the middle earners with enough savings to be resilient will dip below 50 per cent over the next 12 months.

The ONS found that 23 per cent of those earning £15,000-£30,000 are borrowing more.

The latest figures from the Bank of England shows that individuals borrowed an additional £1.8 billion in consumer credit in June, following £900million of borrowing in May. 

This also sits above the 12-month pre-pandemic average up to February 2020 of £1billion.

Those on very low incomes aren’t as able to borrow, so are likely to build up more debts through arrears.

The ONS found that around one in 20 of those earning up to £15,000 are behind on energy bills and a similar number are behind on their mortgage or rent.

How can people manage?

Understanding incomings and outgoings is a vital first step for anyone trying to financially plan for the future.

Rosie Hooper, a chartered financial planner at Quilter says: ‘Take a look at what you have coming in each month and what comes out of your account in terms of bills and payments.

‘This will give you an idea of what might be possible when it comes to saving, or if you need to make any cutbacks to make ends meet. 

‘Get your financial position for a normal month written down on paper. You are more likely to stick to a budget this way, allocating specific amounts for specific things.

‘This can also be easily altered as and when your circumstances change.’

Time for an admin day: Planning your budget will help you to to tackle any financial hurdles head-on - and give you a real assessment of your finances.

Time for an admin day: Planning your budget will help you to to tackle any financial hurdles head-on – and give you a real assessment of your finances.

For those trying to reduce their outgoings, drawing a line between essential and discretionary spending is key.

Essential spending is anything that can’t be cut out: the mortgage or rent, utility bills, groceries, and any medication for example.

There are also essentials that you may only pay once a year, such as home insurance and car insurance.

Discretionary spending on the other hand, is anything you can live without. 

This might include a gym subscription, Netflix account, a daily cup of takeaway coffee or food deliveries. 

ONS data shows that most people earning between £30,000 and £40,000 are now cutting back on non-essentials.

However, the ONS data also suggests that many people are also cutting back on essential spending with 16 million people have cut back on food and essentials.

Tempted: Now might be a good time to cut back on some of your expensive habits.

Tempted: Now might be a good time to cut back on some of your expensive habits.

While budgeting doesn’t mean cutting out anything that isn’t a ‘must have,’ dividing up spending in this way can help people to identify anything they would be prepared to reduce or cut out completely. 

Sarah Coles says: ‘It’s worth going through your budget carefully, looking not only at the non-essentials you can cut but also at whether you can spend less on the essentials.   

It is also becoming increasingly important to find the best value in the things you do buy, according to Coles, whether that means changing broadband provider or shopping at a different supermarket.

‘Shopping around for everything from cheaper mobile and broadband, to cheaper brands or a cheaper supermarket can shave vital chunks from your spending,’ adds Coles. 

‘Shopping around will also help you protect more of your savings, and hang onto some of the resilience you built over the past two years.’

Three apps to help you save

Chip is an automatic savings and investment app designed with the intention of helping its customers to save without having to even think about it.

Chip uses artificial intelligence technology linked to your bank account via open banking to calculate how much its customers can afford to save based on their spending habits.

It then transfers that money from their current account to their Chip account – automatically whilst not interfering with a person’s normal day-to-day spending habits.

Customers can increase or decrease the amount Chip puts aside by tweaking their saving level on the app, which determines how fast or slow they want to save.

Chip can apparently adapt to a person overspending or earning irregular income and can adjust the savings amounts accordingly.

It offers a host of features – it analyses your spending habits, helps set savings goals, and can automatically set a regular amount to save every time you get paid by your employer. 

Moneybox is an app that allows savers to round up their everyday bank card purchases to the nearest pound and set aside the spare change into a savings account.

Similar to Chip it uses open banking to link to your bank account and means savers can get into the habit of saving every time they spend without having to actively set aside money.

Savers can also deposit money into their account on a weekly or monthly basis and even give themselves a monthly boost when payday arrives.

The round-ups feature will likely be particularly attractive to those who are struggling to get into a savings habit.

How much you save will depend how many transactions you make, but according to Moneybox, its customers are making around 30 transactions per week with an average round up of about 28p each time, resulting in £8.41 savings per week from round ups alone.

Similar to Chip and Moneybox, Plum connects to your current account and analyses your incomings and outgoings.

It analyses transactions and then identifies your regular income, rent, bills and daily spend.

Using this and other factors like your available balance it calculates daily what amount it can safely put aside without impacting your daily life and moves it to your Plum account via direct debit every four to five days.

It also offers a round-up feature much like Moneybox so you can save spare change without any effort.

You can create your own savings buckets based on your personal goals whether that be a holiday or a house, for example.

Plum is then able to adapt to help you automatically save to meet those goals.

It also allows you to choose your own auto-saving rules or you can pick a mood to save based on how you’re feeling.

For example, if you’re feeling ambitious, you can expect Plum to start saving 50 per cent more than usual, or if you’re feeling shy, then you can expect 50 per cent less savings than usual.