The pound fell to the lowest point since decimalisation in 1971 early this week, stopping just shy of reaching parity with the dollar – but what does this mean for your money?
Sterling dropped 4.9% against the dollar to $1.03 on the morning of September 26, before regaining a little bit of ground to $1.08 later that day.
David Robinson, co-founder at law company Wildcat Law, said: “The markets are showing what they think of the “mini-Budget” and unfortunately, it’s not in Truss they trust, it’s the safety of the US dollar. I’m sure many will be pointing out that nearly every major currency has weakened against the dollar, however the numbers show that sterling has suffered more than most. Any minor uplift to household budgets given by the mini-budget will be more than outweighed by the impacts of sterling’s slide.”
Unless you’re about to head off on holiday and need to stock up on travel money, you might feel a bit detached from all the headlines about the pound plummeting, but it can have a major impact on your finances. Here, we explain why the falling pound makes life more expensive, and what you can do to protect yourself.
Why is the pound falling?
The government announced big tax cuts in its mini budget last week, which will be paid for by borrowing.
The pound has plummeted due to concerns that the tax cuts won’t be able to be fully-funded, which will result in a large amount of debt. The cost of government borrowing has also risen due to these worries.
Tim Mottram, financial planner at Grey Parrot Financial Planning said: “The government’s strategy has sent the pound crashing for good reason. The rest of the world thinks it’s a bad idea to cut taxes. The tax cuts are funded by borrowing at a time of increased interest rates and already high debt levels.”
What does the weaker pound mean for me?
As mentioned, many of us only pay real attention to exchange rates when we go on holiday, but the weak pound affects our finances in lots of other ways:
Living costs
When the pound falls, it costs more for UK businesses to import goods and services denominated in dollars. Thanks to steep energy costs and soaring inflation, few companies will be in a position to absorb these extra costs, which are likely to be passed on to consumers.
That means unless action is taken, you can expect to pay more for fuel prices and everyday goods as transport costs go up, as well for imported goods.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Many household will want to try taking steps to shore up their finances: pay down debt starting with the costliest ones and variable rate loans; and build and maintain an ample cash buffer for emergency spending – three months’ salary worth is a good rule of thumb, if not more. Both will allow households to better weather higher interest rates and the cost of living cunch which is set to become more acute.”
Learn more about building a cash buffer in our guide How to build an emergency fund and find out ways to keep living costs down in our article How to save money – 19 best money saving tips.
Mortgages
The Bank of England may have to call an emergency meeting to hike interest rates again to try to defend the pound, even though they raised the base rate by half a percentage point earlier this month.
If this does happen would mean borrowers on variable rate mortgages would see their monthly payments jump again – just when they are coming to terms with the latest increase a few days ago.
It’s not only those on variable deals who will be affected by rising rates. If you’re coming to the end of a fixed rate deal in the next few months, you’re likely to find that the rates on offer are much higher than the rate you’re currently paying. It’s therefore really important to act now and see if you can secure your next deal before rates end. Most lenders will allow you to lock into your next rate six months before your current mortgage deal finishes. Find out more in our guide Five good reasons to remortgage right now.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Holiday money
Holidays can be expensive enough, but when you’re having to deal with rotten exchange rates, this can really bump up the cost of your bills. It’s not just the dollar the pound has fallen against, you also won’t get much bang for your buck if you’re heading to Europe soon. This means you might have to rein back on eating out, or reduce the number of excursions you might have planned while you’re away.
Sarah Coles, personal finance analyst at Hargreaves Lansdown: “You can still make an enormous difference by shopping around for the best possible exchange rate. Whether you choose a current account or credit card with no overseas fees, or buy your currency in advance for a better deal, you can get far more for your money than if you exchange your money as a last-minute afterthought at the airport.”
Find out more about how to track down the best deals on your holiday money in our guide Travel money: where can I find the best exchange rates?
Savings
The falling pound is likely to push inflation higher, which means even though interest rates are rising and you can earn better returns on your savings, the purchasing power of your cash continues to erode.
Even if there is an emergency rate increase, there are no guarantees your provider will pass this on, so keep a close eye on returns and be ready to switch accounts if you find higher rates elsewhere.
Ms Coles said: “It’s more important than ever to shop around for the most competitive deal on your easy access savings. You should also consider whether it makes sense to fix money you won’t need for the next year or so for a period that makes sense for you – in return for a better rate. At the moment, the one-year fixed rate market is particularly competitive – with the best rates over 3.5%.”
You can find the best fixed rate bonds in our article Fixed rate savings bonds explained.
Investments
It’s been an unsettling time for investors, as worries about the Chancellor’s tax-cutting measures hit home. British government bond prices are now on target for their biggest slump of any calendar month since at least 1957, according to a Reuters analysis of Refinitiv and BoE data.
If you’re an investor and have international investments, and if sterling weakness continues, then any gains or income you make will be worth more when translated from dollars into pounds. The FTSE 100 index of Britain’s largest companies tends to benefit from a weak pound, because most big companies earn the majority of their money overseas, although depending on what happens in the days and weeks to come there’s a risk global investors might become increasingly spooked and start selling off British assets.
Jason Hollands, managing director of online investment platform Bestinvest said: “While currency movements have helped ease the impact of US equity losses so far this year, unless you believe the dollar will just continue to get stronger and stronger for the foreseeable future – who knows! – at some point the trend will reverse.
“In respect of equity markets, for UK investors with battered up pounds in their pockets it may be better to consider focusing on large cap UK equities in the near term. These have relatively modest exposure to the domestic economy – which despite the energy cap and tax cuts is still facing a challenging period ahead due to rising borrowing costs and a reduction in real earnings.”
If you’re worried about the impact of the falling pound on your pension savings, it’s a good idea to review where your pension is invested and check that you’re on track to achieve the kind of retirement you want.
If you want personal recommendations about where to invest your retirement savings, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.