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UK disposable income falls 3% as price rises force more to borrow to pay bills, study finds

·Personal Finance Columnist
·6-min read
UK's high inflation and rising cost of living has hit low-income households hardest. Photo: Niklas Halle'n/AFP via Getty Image
UK's high inflation and rising cost of living has hit low-income households hardest. Photo: Niklas Halle'n/AFP via Getty Image

Runaway price rises have ridden a coach and horses through household financial resilience in the UK. The latest HL Savings and Resilience Barometer reveals that in the past three months, two in five people have had to dip into savings, cut back or borrow money to cover their costs. And things are set to get even tougher.

Inflation lies at the heart of the problem. Once price rises are taken into account, disposable incomes fell 3% in the past three months, which has had a knock-on impact on every area of our finances. The Barometer was produced with Oxford Economics, who forecast wages, and even factored in the government’s lump sum payments coming later this year, and discovered that rather than the extra government money undoing the damage, incomes will remain broadly flat for the rest of the year.

It means we’re going to keep eating into savings and building debts. On average, in the next year, the cost-of-living crisis will wipe out any extra resilience we built during lockdowns.

Lower incomes hit hardest

It’s hitting those on lower incomes the three times harder than those on the highest incomes, partly because such a large proportion of their income is needed to cover the cost of the essentials. These bills are rising through the roof, and are far harder to cut back on than the luxuries that crop up in the spending of higher earners. As a result, the bottom 20% of earners will see any savings from the pandemic disappear over the next year.

Given that lower earners were less likely to have been able to build up savings during lockdowns, it means more of them being forced to borrow. As a result, the gulf between the resilience of higher and lower earners that grew during the pandemic, will widen again as the impact of the cost-of-living crisis kicks in.

This is going to hit those in lower-paid occupations, but because the barometer looks at total household income, it means people living alone on middle incomes will be hit just as hard. They’re used to paying the ‘singles tax’ which means everything in life costs them more than if they were to share it as part of a couple, but it’s going to mean this particular tax is ramped up. By the middle of next year, singletons will see their monthly budget hit harder than any other type of family.

Read more: What is the cost of living and how you can manage yours

It’s also going to mean real pain for renters. Separate research from Zoopla shows that rents are up 11% in a year – which is a 14-year high. And there’s no relief in sight. According to the Royal Institution of Chartered Surveyors, over the next five years rents are expected to grow faster than house prices. This will primarily affect younger people, but as more of us rent later in life, it’s also going to spread the pain throughout generation rent. It’s one of the reasons why when looking at how much money people have spare at the end of the month, Millennials will see their position deteriorate more than any other group.

The level of pressure on lower earners means there’s every chance they will need more support as we go through the year, which could mean that any future government interventions are targeted more specifically to those with the greatest need. It will also mean it’s essential that anyone discovering that they can’t make it to the end of the month gets help sooner rather than later. Debt charities like Stepchange and benefits experts like Citizens Advice can help ensure you’re getting every bit of help you can, and understand all your options when it comes to managing your debts.

Hard times for higher earners

It’s not all plain sailing for higher earners either. More of them will hang onto at least some of their lockdown savings. However, as interest rates rise, it’s going to be harder to cover the cost of borrowing, especially for those with big mortgages who see their fixed rate deals expire. This will hit those on higher incomes particularly hard because they tend to borrow more.

Read more: How to save money at the supermarket with picky kids

It’s going to mean the next few months hold a nasty surprise in store for those who have previously considered themselves to be relatively comfortable. The barometer looks at whether people tend to run out of money towards the end of the month. Those who said this hardly ever happens to them are more likely to see their financial position at the end of the month deteriorate than any other group, so that more of them find themselves short of cash.

It means it’s worth even higher earners addressing their outgoings sooner rather than later. There’s a strong argument for cutting back wherever possible, and paying back expensive borrowing, so you’re living life less deeply in the red. It is also worth considering whether it makes sense for your circumstances to move longer term borrowing onto fixed rates, so you have more certainty over your outgoings, regardless of what happens in the broader economy.

The future

We’re already acutely aware of the impact of prices running way ahead of wages on our lives today, and of the threat they pose a year down the track. What makes this piece of work slightly different is that it looks at the impact on aspects of our finances that won’t come into focus until later.

Read more: How to save on fuel costs

Running short of cash is likely to mean fewer people freeing up money for insurance against the worst happening. Less than half of us have enough protection – 43% have the cover they need for their family if they were to die, and alarmingly among single parent families this drops to 12%. This can have a devastating effect on our loved ones if something was to happen, which is why after sorting out our debts, protecting your family is the second biggest priority when you’re sorting your finances.

Financial pressures also mean we’re set to save less over the next 12 months, fall further behind on pension saving and invest less on average as times get tougher. Pension savings aren’t keeping up with the amount of money we’ll need in retirement to cover rising prices, so anyone who finds a way to keep on top of rising prices and still has something left over at the end of the month, shouldn’t overlook the need to put money away for the long term and build their resilience in retirement.

Watch: How to save money on a low income