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The cost-of-living crisis became a household name in 2022. But the crisis started as far back as 2021 and doesn’t show signs of letting up just yet.

Take a dive into what caused the crisis and what it means for your investments. As well as five tips for investing through it.

But first, the fine print. This article can give you helpful tips, but it isn’t personal advice. If you’re not sure about what’s right for you and your investments, think about speaking to an expert. Investments can go down as well as up, so you might get back less than you initially put in.

What is the cost-of-living crisis?

In simple terms, the cost-of-living crisis is the result of prices of goods and services increasing at a faster rate than wages.

Initially this was spurred on by an increased demand for gas from Asia. Coupled with depleted supplies in Europe. But the effects were compounded by the disruption to global supply chains caused by the pandemic.

The conflict in Ukraine also impacted global supply throughout 2022. Sanctions on Russia, as well as temporary closures of factories in Ukraine, continued to create higher prices.

The disruption to gas and energy meant that growing, making, shipping and selling almost everything had become more expensive and this has been passed on to consumers.

It resulted in some of the highest rates of inflation we’d seen in years. That reduces the purchasing power of cash and affects investment returns. A reduction in purchasing power means you won’t be able to buy as much as you did before. If inflation is 10% per year, something that cost you £100 a year ago would cost you £110 now.

How the cost-of-living crisis can impact investors

There are a few ways investors may find they’re impacted by the cost-of-living crisis.

With costs increasing and wages stagnant, disposable income may reduce. Having less, or no, spare cash means investors have less to invest. Or they may need to cash in their investments.

Investors may find the investments themselves aren’t performing as well as they hoped.

For example, investments in bonds that have a fixed interest rate can be impacted by inflation. This is because inflation reduces the real value of the interest payments on the bond. If you want to learn more about this, have a peek at our inflation article here.

Changes in consumer behaviour have an impact on a company’s ability to generate profits and raise funds. The general population might cut back on non-essential items, which could lead to a loss of revenue for some firms.

In an attempt to manage the impacts of the crisis, the government uses policies to help the economy recover. They might do this by changing taxes or increasing or reducing interest rates. Using interest rates to control inflation can in turn affect the performance of different asset classes (shares, bonds, gilts).

Should you invest in a cost-of-living crisis?

Making the decision to keep investing through a cost-of-living crisis can have a powerful impact in the future. But making sure it’s right for you, right now, is the most important factor.

Here are some questions to ask yourself about your general finances and your investment plans:

  • Have you mapped out your general finances?
  • Are you regularly taking money out of your investments to cover emergencies and unplanned bills?
  • Are you chipping away slowly at personal loans and non-essential debt?
  • Do you have a rainy-day fund for those unexpected expenses that crop up?
  • Are you happy that you've got an investment plan that works for you?
  • When was the last time you looked at how much risk you're happy to take on?
  • Are you comfortable with how much you're investing?

Make sure you're happy with those answers, and you're on track with your own personal finance goals.

There's no hard or fast rule that says you should or shouldn't invest in the middle of a cost-of-living crisis. But making sure you're putting safety nets in place is important.

Five tips for investing through the cost-of-living crisis

  1. Build up your reserves first

    One of the most important factors to investing successfully is making sure you have a fall back. Building up your cash reserves is just as important as investing for the long term. Cash reserves are there to lean on when unexpected bills arrive or when you need a little boost. You could keep enough cash to cover your last three unexpected bills, or one to three months of expenditures.

  2. Invest little and often

    Used to putting lump sums away into your investment account or ISA? Try the little and often approach. Investing smaller amounts more regularly could help you to achieve your goals faster. Sounds counter intuitive? Not necessarily. If you’re waiting to build up cash before you invest, your money isn’t benefiting from time in the market. Little and often (sometimes known as pound-cost-averaging) investors may find their money is able to cope better with market volatility. Investing regularly helps to average out the fluctuations in the market. Find out more about investing regularly here.

  3. Factor in higher prices

    Keep in mind that the price of some items won’t reduce once the Bank of England’s 2% goal for inflation is reached. Higher prices may be sticking around for a while longer. Keep this in mind when making any important decisions with your investments.

  4. Stay the course

    It can be so easy to get scared off when you’re investing and the markets aren’t performing as you’d hoped. Keeping calm and not making quick decisions that could harm your investment goals is easier said than done. But investing over the long term can be more fruitful than stopping and starting time and time again.

  5. Know what you're investing for

    Do you remember what convinced you to start investing in the first place? For some, it could have been a recommendation from a friend. Or even seeing an ad on social media. Whatever prompted you to invest might not be the same reason you stay invested. Plans change and life has its twists and turns. Remember to check in and understand what you’re investing for. You don’t need to invest for a specific goal. But remembering the intent behind your action can help you to keep on track.

What is the cost-of-living crisis?