Average earners are poised for a savings crisis over the next year as rising prices force many to spend the pots they have potentially accrued during lockdown.
According to the study by Hargreaves Lansdown and Oxford Economics, only the wealthiest 10% of households are likely to increase their savings over the next 12 months.
Meanwhile, middle-income households in general will see the biggest hit to savings pots of all income groups.
Break the Bank: Average earners are set to face a savings crisis over the next 12 months as rising prices force them to spend their lockdown savings.
At present, 56% of middle-income households – those with an average household income of £31,800 after tax – have enough savings, but within a year that will drop to 48%, according to the research.
Sufficient savings is defined as the recommended emergency safety net of at least three months of essential expenses.
According to Hargreaves Lansdown, those in the bottom of the fifth middle income earner will see the biggest hit to their savings.
Within a year, the number of these households with sufficient savings in the bank will have fallen from 52% to 42%.
The research matches the latest data from the Bank of England, which suggests the amount Britons are saving is falling.
The combined net flow of savings into savings accounts and NS&I accounts in June was £1.9bn, compared to £5.6bn in May.
This is also well below the average monthly net flow of £4.7bn per month seen in the pre-pandemic 12-month period to February 2020.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “That doesn’t mean middle earners will face greater challenges than those on low incomes, but saving is their Achilles heel.”
“The proportion of middle-income people with enough savings to be resilient will fall below 50% over the next 12 months.”
The situation is even worse for low-income people. According to the study, only 30% of the lowest earners have enough savings now, and only 24% will have enough in a year.
Those who have no savings to fall back on, earn less than average, but who do not have very low incomes are likely to borrow more through credit cards and loans to join two ends.
The proportion of middle-income people with enough savings to be resilient will fall below 50% over the next 12 months.
The ONS found that 23% of those earning between £15,000 and £30,000 borrow more.
The latest Bank of England figures show individuals borrowed a further £1.8bn in consumer credit in June, following £900m of borrowing in May.
This is also above the pre-pandemic 12-month average to February 2020 of £1bn.
People with very low incomes are not as able to borrow and therefore risk taking on more debt due to arrears.
The ONS found that around one in 20 of those earning up to £15,000 are behind on their energy bills and a similar number are behind on their mortgages or rent.
How can people manage?
Understanding inflows and outflows is an essential first step for anyone trying to financially plan for the future.
Rosie Hooper, Certified Financial Planner at Quilter, says, “Look at what you receive each month and what comes out of your account in terms of bills and payments.
“It will give you an idea of what might be possible in terms of savings, or if you need to save to make ends meet.”
“Get your financial picture for a normal month written down on paper. You’re more likely to stick to a budget this way, allocating specific amounts to specific things.
“It can also be easily changed as your situation changes.”
It’s time for a day of administration: planning your budget will help you tackle all financial hurdles head-on and give you a true assessment of your finances.
For those trying to cut spending, it’s essential to draw a line between essential and discretionary spending.
Essential expenses are anything that cannot be removed: the mortgage or rent, utility bills, groceries, and any medications, for example.
There are also essentials that you can only pay for once a year, such as home insurance and car insurance.
Discretionary spending, on the other hand, is all you can do without.
This can include a gym membership, a Netflix account, a daily cup of coffee to go, or food deliveries.
ONS data shows 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 having reduced their diet and essentials.
Tempted: Now may be the time to cut back on some of your costly habits.
While budgeting doesn’t mean cutting out everything that isn’t essential, dividing up expenses in this way can help people identify anything they’d be willing to cut back on or eliminate altogether.
Sarah Coles says, “It’s worth going through your budget carefully, looking not only at which non-essentials you can cut back, but also whether you can spend less on the essentials.
It’s also becoming increasingly important to find the best value in the things you buy, according to Coles, whether that’s switching broadband providers or shopping at a different supermarket.
“Shopping for everything from cheaper mobile and broadband, to cheaper brand names or a cheaper supermarket can cut your expenses,” adds Coles.
“Shopping around will also help you protect more of your savings and retain some of the resilience you’ve built over the past two years.”
Three apps to help you save
Chip is an automatic saving and investing app designed to help its customers save without even thinking about it.
Chip uses artificial intelligence technology linked to your bank account through an open banking system to calculate how much its customers can afford to save based on their spending habits.
He then transfers that money from his checking account to his Chip account – automatically without interfering with a person’s normal daily spending habits.
Customers can increase or decrease the amount Chip sets aside by adjusting their savings level on the app, which determines how fast or slow they want to save.
Chip can apparently adapt to someone who overspends or earns irregular income and can adjust savings amounts accordingly.
It offers a host of features – it analyzes your spending habits, helps you set savings goals, and can automatically set a regular amount to save each time you get paid by your employer.
Moneybox is an app that allows savers to round up their daily bank card purchases to the nearest pound and set aside spare change in a savings account.
Similar to Chip, it uses open banking to connect to your bank account and means savers can get into the habit of saving every time they spend without having to actively save 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 roundups feature is likely to be especially appealing to those who struggle to form the habit of saving.
How much you save will depend on how many transactions you make, but according to Moneybox their customers make around 30 transactions a week with an average rounding of around 28p each time, which is a saving of £8.41 a week just with rounding.
Similar to Chip and Moneybox, Plum connects to your current account and analyzes your inflows and outflows.
It analyzes transactions and then identifies your regular income, rent, bills, and daily expenses.
Using this and other factors like your available balance, it daily calculates how much it can safely set aside without affecting your daily life and transfers it to your Plum account by direct debit every four to five days.
It also offers a summary function similar to Moneybox so that you can save coins without any effort.
You can create your own savings buckets based on your personal goals, whether it’s a vacation or a house, for example.
Plum is then able to adapt to help you automatically save towards those goals.
It also lets you choose your own auto-recording rules or you can choose a mood to record based on how you feel.
For example, if you’re feeling ambitious, you can expect Plum to start saving 50% more than usual, or if you’re feeling shy, you can expect to save 50% less than usual. .
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Can you save as bills soar? The savings crisis will affect middle incomes