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

·Personal Finance Columnist
·7-min read
The best way to figure out how much life costs us, and how much these costs are rising right now, is to draw up a budget and keep an eye on it. Photo: Getty
The best way to figure out how much life costs us, and how much these costs are rising right now, is to draw up a budget and keep an eye on it. Photo: Getty

For something that has such a profound effect on our lives we know remarkably little about the cost of living. If someone was to ask you how many steps you took yesterday or units of alcohol you drank last week, you’d have a pretty good handle on it, but if they asked how much your life cost, most of us wouldn’t have the slightest idea.

We know what the average is. The Office for National Statistics calculates that in an average week in 2020 the average UK family spent £587.90. The trouble is that nobody is really average. The same set of figures show that on average we spend 10p a week on crash helmets, whereas in reality few of us have it in the weekly shop.

Inflation figures suffer the same problem. When the ONS came up with an inflation measure of 9% in March, it included a figure for the rise in the cost of boats. It means that in reality, the only way we know how much life costs us, and how much these costs are rising right now, is to draw up a budget and keep an eye on it.

Most people never get round to this, but if you put one hour aside for it now, it can save you endless hours of worry over money later.

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If you have a current account app that analyses your spending, it makes everything easier, but even if you don’t, you can gather all the information you need.

This includes keeping a spending diary for a few weeks to see where your money is really going, then getting together some recent statements to check your bills, and separate statements around Christmas and holidays, so you can see what you spend on them.

Armed with all this, you can plug the details into an online budget tool. You can add details of your income too, so you can see whether there are cuts to be made.

They’ll also show you the areas where money is leaking, or your spending weaknesses, so you can identify the habits you need to change.

Bring out the Fantastic Four of your budgeting traits. Photo: Fox
Bring out the Fantastic Four steps to cutting your costs. Photo: Fox

Fantastic four

There are 4 sensible steps to cutting your costs:

  1. Identify the easy cuts — the luxuries you don’t get much out of. These are often lurking in forgotten direct debits.

  2. Shop around. You shouldn’t be paying over the odds for anything from your mobile phone to your groceries.

  3. Make small lifestyle changes so you use less of everything every day. This can include small tweaks like cutting unnecessary car journeys, using the cold wash on the washing machine, or keeping your shower down to three minutes.

  4. Then consider larger lifestyle changes. This can include anything from forgoing the family holiday, to moving somewhere more affordable or getting rid of a car. These big changes can be incredibly difficult, but they can cut your outgoings dramatically overnight.

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The aim of these cuts is to leave you spending less than you earn each month, so you have some money left over to make a real difference to your life. If you don’t know how to prioritise what to do with your money, the five to thrive can help. It takes you through the five steps to improving your finances.

Five to thrive

  1. Protect your family. If you have people who depend on you, you can consider things like life insurance, or protecting your income if something happens to you.

  2. Once this is covered, use any extra cash you’ve freed up to pay down expensive debts. It makes sense to do this on the day you’re paid, and by direct debit, so you do the right thing without thinking about it — and without really noticing.

  3. Once you’re on top of your debts, redirect the monthly direct debit into a savings account. The aim is to build up savings to cover three to six months’ worth of essential expenses in an easy access account, which you can fall back on when life takes a turn for the unexpected. It’s a big chunk of money, but don’t be put off by the task ahead. When you come to use this cash, you’ll be grateful for anything you’ve been able to set aside.

  4. At the same time, you need to consider the future. We can’t just afford to focus on what’s directly in front of us, we need to consider things like retirement savings too.

  5. Finally, and only when all these things are under control, can we consider investing to make more of our money.

You don’t have to tackle this all at once. Just drawing up the budget and cutting your costs can transform your qualify of life overnight if it brings your spending back under control. Then you can build resilience into your finances more gradually over time.

A photograph arranged as an illustration in Hartley Wintney, west of London on August 19, 2020 shows the Starling Bank banking app on a smart phone. - In the nation's booming financial technology or fintech sector, mobile phone app-based
The Starling Bank app offers insights into your spending, and has some useful savings tools — including setting savings goals. PhotoL Adrian Dennis/AFP via Getty

Five free budgeting apps

1. Moneydashboard

This free app connects all your accounts, which lets you track your spending, and categorise it to see what you’re forking out for things like holidays and bills.

You can also feed in details of regular direct debits, so you can see how much money you have left when these are taken into consideration. And you can set up budget goals, and track your progress.

2. Emma

This offers some similar functions to Moneydashboard, and has a free app as well as a paid-for service. If you regularly share payments with other people, you can also use the app to pay each other back, or send cheery reminders about money that’s outstanding.

3. Monzo

There are a couple of different accounts, and the best budgeting tools are on the one you pay for. However, on the free account, you can set spending budgets for specific things during the month, and track how much you have left at any time.

There are some useful savings features too, like the ability to round up your spending and put the excess into a savings account.

4. Starling

This offers insights into your spending, and has some useful savings tools — including setting savings goals.

5. Chase

This is a relative newcomer in the UK, despite its long history in the US.

It offers spending insights, broken down into specific categories. It also lets you set up and manage a number of current accounts, so you could choose to have one for your bills and one for everything else.

It has a round-up feature too, where everything you spend on your debit card is rounded up and the extra put into a savings account — paying 5%. In reality it’s not going to make your rich, but it’s a nice feature.

Check your banking app, because even traditional high street banks have made big improvements in recent years. If your current account doesn’t offer any budgeting tools, and this is important to you, then you could consider moving to a newer, online bank.

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However, while apps are all very useful, a current account is about more than just the app, so you need to be comfortable with everything else about it too — from the interest it pays to the charges on borrowing and the customer service ratings.

Usually we’d recommend going back to your budget every year to tweak the figures, but at the moment, it makes sense to try to keep an eye on your spending as you go along. If your bills rise, or you start spending more at the supermarket, spare a couple of minutes to feed this into your budget, so you know exactly where you stand.

Watch: How to save money on a low income

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