FAMILY FINANCES ARE SQUEEZED – WHAT CAN YOU DO TO EASE THE PAIN?

First published by: The Guardian

Look at how to bridge the income gap

With everything from the cost of driving, food and bills rising families are struggling. Spring will bring a chill for most of us - a combination of at least 45 tax and benefit changes will ransack household budgets already depleted by soaring food and fuel prices, and predicted interest rate rises will tip many mortgage holders into the red.

On average, households are already £480 a year worse off following tax changes introduced in January, according to the Institute for Fiscal Studies. April's reforms, including increases to fuel duty and national insurance contributions, will add an extra £200 burden. 

The problem of making ends meet is particularly acute for families. Last year households with dependent children needed an additional £650 a month just to cover everyday living costs compared to those without, according to the Consumer Credit Counselling Service (CCCS).

Families with more than three children are, on average, £45 short of the money they need to live each month. No wonder, then, that 28% of Britons are spending more than they earn each month, according to Cooperative Insurance and homeless charity Shelter. Joanna Parsley, associate director of charity Credit Action, said: "Even people who have had a marginal increase in their salaries will find it is cancelled out by rising living costs. Those with no children or on lower incomes might be better off because of an increase in the personal allowance, but for most of us there really is no way to avoid the squeeze. It is vital that everyone looks to revisit their finances and get them in order."

Homeowners are likely to be more precarious than renters, the CCCS said. On average, clients who own their own home have more than £30,000 in unsecured debts on top of their mortgages. And although interest rates on credit cards and personal loans don't usually move in line with bank base rate, a 2% rise would lead to a £307 increase in monthly mortgage payments. "It is the lull before the storm," said CCCS spokeswoman Una Farrell last week. "Mortgage holders have managed quite well because interest rates have been so low, but we are expecting a big influx of new clients as rates rise."

No section of society is safe. CCCS chairman Lord Stevenson said: "It seems likely that many more families, including better-off ones, will be increasingly prone to over-indebtedness in the months ahead. "It is also not a uniform picture: public sector cuts in terms of jobs, spending and benefits will weigh disproportionately on certain groups, and the incidence of unmanageable debt bears down harder on specific parts of the country, such as London and Yorkshire."

It is easy to blame inflation and tax rises, but are we also to blame for expecting too high a standard of living? Apparently not, if research by First Direct is anything to go by. It found that young people would have to increase their income by 55% to enjoy the lifestyle their parents had at the same age. The figures show that someone in their mid-twenties would have to earn £39,720 to buy a house, fund a wedding and afford a first child; the average salary for 20-somethings is nearer £25,000.

In November the Office of National Statistics released its latest data on the cost of UK lifestyles, which showed that in 2009 the average household spent £16 a week less than the previous year - the first time expenditure has fallen since current recording methods were introduced in 2001. "In statistical terms that's quite a robust change," said ONS statistician Giles Horsfield. "We noticed that a greater proportion of the weekly spend went on food, and less went on transport and recreation."

Figures for 2010 won't be released until the end of the year, but transport and food will almost certainly swallow even bigger slices of the weekly budget thanks to an increase of about 18 % in fuel costs over the past year, according to PetrolPrices.com, and a 4.2 % increase in groceries, according to shopping website mySupermarket.

The average disposable household income in the UK of £28,354 is clearly not enough to meet a household's daily outgoings. So, the Observer decided to look at typical and - in most cases -essential household costs to work out exactly why we are so broke, whether the situation is likely to get better or worse - and what you can do about the income gap.

Motoring

The expense of running a new car rose to £5,869 last year, with fuel (£1,300) and depreciation (£3,072) the most significant costs, according to the RAC. Owners of used cars faced an average cost of £4,441 in 2010, including £1,396 in fuel and £1,040 in depreciation. With the average cost of a litre of standard unleaded now costing 133.34p and a litre of diesel hitting 139.71p, according to PetrolPrices.com, it will come as no surprise that the cost of running a car is expected to soar this year.

Fuel duty is set to rise by inflation plus 1p on 1 April (the ninth tax increase since December 2008), adding between 3p-4p a litre at the pump and around £50 to the average annual bill. To combat rising fuel costs, drivers should make sure tyres are well inflated and should drive sensibly, get their car serviced regularly to maintain engine efficiency, avoid unnecessary use of air conditioning, and get rid of roof racks to improve aerodynamics. Also consider lift-sharing, try to find the cheapest local petrol - PetrolPrices.com is a useful source - and take advantage of discounts and supermarket deals.

To reduce insurance costs you should shop around for the best deal; consider buying a smaller car; pay your premium up front; park in a driveway or garage; consider a third party fire and theft policy if your car is low-value; and don't overestimate your mileage. Young female drivers, who are expected to be hit by soaring premiums following the recent European ruling banning the use of gender in underwriting, may benefit from the introduction of "black box" based policies which are based on the safety of a policyholder's driving habits.

Mortgages

Thanks to the Bank of England base rate staying at 0.5% for the past two years, monthly mortgage payments have dropped to their lowest levels in 10 years. The average mortgage borrower, according to the Council of Mortgage Lenders, owes £109,110 at an interest rate of 3.5%. The vast majority of mortgages are set up on a repayment basis, and the monthly premium for a loan this size would be £546.23. However, most experts expect the base rate to rise very soon, which will increase the cost of all variable rate deals. Each 0.25% rise in base rate will add £15 to a £109,110 repayment loan, according to moneysupermarket.com.

David Hollingworth of mortgage broker London & Country says most people will opt for a fixed rate to protect themselves against rises. Nationwide building society has a five-year fix at 4.39% with a 70% loan-to-value (LTV) ratio and £999 application fee, while Norwich & Peterborough building society has a five-year fix at 5.38% with an 85% LTV and £995 fee. However, those who are more confident that their finances can absorb some extra costs may prefer to take the risk that the base rate will rise slowly, opting instead for a tracker mortgage. HSBC's lifetime tracker is set at 1.79% above base and has an LTV of 60% and fee of £99.

Food

The FAO Food Price Index rose for the eighth month running in February, up 2.2% from January and at the highest level since January 1990 when the index began. In the UK, certain foods climbed in price at the beginning of the year as VAT rose from 17.5% to 20%, but other items - tea, ground coffee, butter, pasta, fruit juice, bread and vegetables - have shot up still further, according to mySupermarket.co.uk.

Dalia Mays, a spokeswoman for the site, says there to reduce the cost of the weekly shop. Try swapping your regular supermarket for a cheaper one: buy your staples at Asda rather than Sainsbury's or Waitrose. Try setting a budget and shopping online: it means you can buy everything you normally would but you won't be tempted by off-list extras. She adds: "Everyone has the brands they will never swap, such as Diet Coke or Heinz ketchup. But for things you're not too bothered about, try the supermarket own brand, or better still the supermarket value range."

Mysupermarket calculates the VAT increase will cost food shoppers an extra £66 in 2011 compared to 2010. But you can avoid VAT altogether by making crafty substitutions: buy tortilla chips instead of crisps, cream gateaux instead of arctic roll and chocolate chip biscuits instead of chocolate covered ones, unshelled salted nuts instead of shelled ones.

Utilities

Although households benefited from price cuts in 2009, the proportion of the household budget spent on energy rose substantially in 2010 thanks to freezing weather at the beginning and end of the year, and prices have risen by an average of 6.5% over the past 12 months. The average annual dual fuel bill was £819 in January 2008, but now stands at £1,132, according to uSwitch.com. Spokeswoman Ann Robinson said that if Ofgem considers current profits being made by energy companies as reasonable, and oil prices remain high, there is "a reasonable chance energy prices will go up later this year".

Consumers should check whether they can save money on bills and cut the amount of energy they use. Consider fitting an energy efficiency device to help reduce use, and turn things off when they are not in use. Insulating a home or installing an energy efficient boiler can produce longer-term savings.

Paying by direct debit each month will help reduce bills (suppliers offer discounts for paying this way) and consumers should make sure take regular meter readings as estimated bills can be disporportionately higher. Anyone who is concerned about paying their energy bills should contact their supplier to discuss the options.

Council Tax

The average band D household is expected to pay £1,438.87 for Council Tax in 2011, down 35p on last year, according to the Chartered Institute of Public Finance and Accountancy. The government has stumped up £650m to local authorities to allow them to freeze bills this year, although some are still imposing increases.

There's not much you can do to reduce the size of your Council Tax bill. But if you are the only adult in the household, you may qualify for a 25% discount. Other adults may be "disregarded", including full-time students, student nurses, young people on government training schemes or those following apprenticeships, and live in care workers. If everyone who lives in the property is disregarded there will still be a Council Tax bill, but it will be discounted by 50%. Check whether your household qualifies on the Citizens Advice website.

Credit cards

The most vulnerable to debt are those with children because they have less flexibility to reduce their expenditure, which means they are more likely to take out credit to meet living costs. If you want to reduce the interest you pay help may be at hand with MBNA's recent introduction of an 18-month 0% balance transfer card. This sparked a card price war with Virgin Money entering the fray with a deal to match the MBNA card. Barclays then stretched its own 0% interest period on balance transfers from 18 months to 20 months.

While the credit-scoring might be tougher on new cards, switching your debt to a card incurring no interest is a sensible move. Decent deals are also on offer from M&S (0% for 15 months) and Nationwide (0% for 17 months) - but make sure you compare the balance transfer fees and check the length of the offer for new purchases made on the card - the reversion interest rate is always markedly higher

READ WHAT: ERIC PICKLES ‘SECRETARY OF STATE’ SAYS ABOUT OVER-CHARGED COUNCIL TAX.

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