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Are you heading for a financial car crash?

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Millions of people in the UK are in denial about the financial headwinds they face in their household finances because of rising inflation and the impending increase in the energy cap.

While many people are taking steps to cut their spending, others are not. Research by Grant Thornton and Retail Economics found that UK adults fall into one of four financial personas, with 25 per cent described as “squeezed spenders”. People in this group face financial pressures but seem unfazed by rising prices. They are unwilling to adjust their spending to adapt to higher living costs or build up an emergency fund.

The authors conclude: “This cohort tend to live in the moment, [are] likely to dip into savings, increase their borrowing, or use buy-now-pay-later schemes to make non-essential purchases as they tend to not let money worries impact their spending habits.”

Squeezed spenders recognised that making economies or delaying big purchases was necessary, the research found, but their “carefree attitude” made them reluctant to do so. “Typically urban and middle-income, these consumers are a mix of ages.”

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Spending habits and behaviour are closely linked to personality type, childhood experiences, environment and emotional wellbeing. Doing what is in our medium- to long-term best interests can easily play second fiddle to doing what feels comfortable or appealing in the present.

Modern marketing exploits our preference for immediate rewards (known as hyperbolic discounting) by linking buying goods and services to experiencing pleasure or avoiding emotional or physical pain.

We might buy a new car to look cool. We buy beauty products to look attractive. And we’ll go on an exotic holiday to get away from the routine of our daily life. Marketing messages are relentless, seductive and persuasive.

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Holiday bookings have surged in spite of the negative outlook for household finances over the coming months. Grant Thornton’s researchers surveyed 2,000 UK adults in May. They found that more than half of households intended to go ahead with their holiday plans, despite the worsening financial outlook.

Even more worryingly, 70 per cent of UK consumers said they were more likely to choose a pay-by-instalment option like “buy now pay later” to fund travel over the coming year, according to travel company Amadeus.

After two years of Covid restrictions, many people feel they deserve a break, even if it makes no sense financially. They desire the immediate pleasure of a few weeks in the sun and ignore the inevitable financial pain that some will suffer for months or years afterwards.

It is a feeling I know well. When I was in my early 20s, I was deep in debt. My flat was worth a lot less than the outstanding mortgage and I had maxed out my credit cards and overdrafts. But I still decided to pay several hundred pounds that I didn’t have to hire out a local wine bar for a private party. I wanted the buzz of showing my friends a good time and to forget my financial problems — and never mind the consequences.

The fact is that people make most financial decisions based on their emotions, not logic.

A study from Stirling University found that people who set financial goals save more and have greater financial wellbeing. The research also found households that set goals were more likely to save and invest their savings in riskier assets with a higher long-term return.

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The cost of living squeeze is likely to worsen and go on for longer than most people think. It makes sense, therefore, to plan for the worst and hope for the best. If things turn out better than expected, you’ll be able to loosen up and spend on non-essentials. But if high living costs persist, at least you’ll have more wriggle room.

Here are a few suggestions for improving your financial wellbeing and resilience in the face of more challenging financial times.

Create a spending plan
Forget budgets. Create a plan for your spending based on the money that you have now. Most people underestimate how much they spend each month. Money coming in must equal money going out. Give every pound, dollar or euro a “job” to do in advance. And remember to make a monthly allowance for irregular (that is, non-monthly) expenses such as holidays, car servicing and dental work.

Be careful what you give attention to
Unsubscribe from marketing emails and be careful what you read and watch. Limiting exposure to powerful marketing messages will reduce the urge to spend on non-essentials.

Be careful who you hang out with
If members of your social circle are high spenders or have poor financial self-discipline, there is a good chance it will rub off on you and lead to bad financial habits.

Create a big picture financial plan
Financially successful people tend to have a much longer time horizon and set clear financial goals, against which they can weigh the implications of short-term spending. A fixed-fee financial planner can be a great help here in helping you develop a few long-term financial scenarios to give context for your day-to-day financial decisions and actions.

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Think small
Try to make small but sustainable changes to your finances. You become more confident by taking small steps and seeing progress than attempting unrealistically big changes that make you feel bad when you fail to stick with them.

Make it easy and simple
Automate as far as you can everything involving savings, investing, debt repayment and regular bills. Use separate bank accounts for different priorities. Avoid debt facilities such as credit cards, overdrafts and buy now pay later. They make it too easy to wander into debt.

Have the biggest emergency fund you can muster
Cash might not be a good long-term store of wealth, but having access to enough money to help cope with changing income and expenses will enable you to turn potential dramas into mere inconveniences. Sell off unwanted possessions, defer big ticket purchases and save more from income if you can.

As someone who grew up in the 1970s and went through the recession and housing downturn of the early 1990s, I can say with confidence that the current financial squeeze will eventually pass. The question is, what shape will your finances be in when it does?

Jason Butler is an expert on financial wellbeing and presenter of the “Real Money Stories” podcast. Twitter: @jbthewealthman. He is head of financial education at Salary Finance

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