What is the cost of living?

The cost of living is the expense we incur for maintaining the current standard of our daily lives. It’s closely linked to inflation, and if inflation is rising the cost of living will also go up.

That’s because inflation measures the rate at which things are becoming more expensive. So if a pint of milk cost £1 this time last year, but now it’s risen by 5p, then the price of milk has inflated by 5%. 🥛

If the cost of living is rising, you need to make sure that your wages are being adjusted – even if just for inflation. 📊 If you’re earning the same this year as you were last year and inflation is rising, then you’re effectively earning less.

The Office for National Statistics released data in March 2022 to show that nominal weekly earnings had increased by 3.8% on average (excluding bonuses), but this doesn’t keep up with the latest inflation rate – which was 7.0% in March 2022.*

See the latest inflation rates

Rising inflation can also have an effect on the value of your savings and investments. Here are five tips to help you protect your money as the cost of living rises.


How to protect your money from the rising cost of living

  1. Have a short-term savings buffer
  2. Think long term
  3. Make sure you diversify
  4. Check out our Inflation Time Machine
  5. Learn more about inflation


1. Have a short-term savings buffer

A short-term savings buffer means that you won’t have to dip into your investments to make ends meet as the cost of living increases. The general rule of thumb is that a savings buffer should be around three to six months of your monthly outgoings. 💸

Having a savings buffer is a great way to help maximise your investing returns over the long term, because you have the peace of mind that if something happens like a broken boiler or an unexpected vet bill, you’ll be able to cover it.


2. Think long term

Historically, the best investment returns have been made by investing for more than five years. 📅 This gives your money time to grow, and you’ll also benefit from the long-term effects of compound returns.

Learn more about compounding

To enjoy the benefits of long-term growth, you’ll need to leave your money invested. When inflation is rising, that shouldn’t be a problem because stocks and shares can typically still generate positive gains when inflation is high.

For example, the average return for the S&P 500 over the last 50 years (1971 – 2021) was 9.42%. The average UK inflation rate in the same time frame was 5.98% – so historically, investing (especially in stocks) has beaten inflation over the long term. 

Past performance is not a reliable guide to future gains and you may get back less than you invest.

We’ve got an ETF that tracks the performance of the S&P 500, as well as a range of others like gold, clean energy and more. Check them out today.


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3. Make sure you diversify

The rising cost of living will affect certain sectors more than others. The utilities sector could rise as oil, gas and other fuels become more expensive. 💰 Other sectors that tend to do well when the cost of living increases include healthcare and consumer staples. 

That’s because people will always need water, energy, medicine and food, even if times are tough. 🌊💉🍲  

Individual assets that tend to perform well when inflation rises include stocks, and commodities like gold. That’s because the gains on stocks can normally at least keep pace with rising inflation, while commodities like gold are seen as ‘safe haven’ investments due to their inherent value. 

So, if you’re an investor and you’re starting to feel the sting of the rising cost of living, it could be a good time to reassess your investment portfolio and make sure that it’s still in line with your personal risk appetite and investment goals. 💼

Contrary to what you might think, holding your money in an interest paying savings account when the cost of living is rising can be risky. For your money to keep its value, the interest that you’re earning needs to at least match the current inflation rate. So, if your interest is lower than the rate of inflation, you’re effectively losing money.

Our Stocks & Shares ISA is a great way to get started with investing. You get an allowance of £20,000 each tax year to invest however you want – and any gains you earn are tax-free. 🗃️ You’ll be able to invest in our full fund range, including our exchange traded funds (ETFs) – available exclusively to Stocks & Shares ISA customers.

Learn about ETFs and how they work

All investing should be long term – 5 years minimum. Remember, markets can fall as well as rise – and you could get back less than you invest.


Check out our ISA


4. Check out our Inflation Time Machine

To get a feel for how rising inflation can affect your cost of living in the future, we’ve created an Inflation Time Machine. ⌛ It can help you understand how much more you’ll have to earn each year in order to keep up with inflation and maintain the same standard of living.


Try it for free


 5. Learn more about inflation

It may sound like a buzzword, but understanding the effect that inflation can have on your money is really important. That’s because rising inflation doesn’t just affect your cost of living – it can also affect the value of your savings and investments.


Learn more


*ONS, March 2022