Cash Clinic: Our finances are creaking - how can we prop them up?

Question: I AM fortunate enough to earn a decent salary, but we're still struggling with prices going up, school fees and higher taxes. I need to balance living today and saving for retirement. What steps can I take to improve my situation? KD, Edinburgh

Answer: Your predicament is a common one at present and I am afraid there is no simple solution. The ever-increasing cost of living, coupled with lower or even non-existing earnings increases is making life difficult for many families. This is compounded for employees by the recent increase in National Insurance contributions and for those with a family, by reductions to tax credits.

The upshot is that you need to thoroughly appraise your affairs, sorting out the monthly essentials from the non-essentials. Creating and maintaining a monthly budget, perhaps on a spreadsheet, is a good idea. Showing income and then detailing all outgoings from essentials, like mortgage or rent, council tax and utilities bills to regular commitments that could be cut back - such as cable or satellite movie packages or unused gym memberships - can allow you to see what income you may have left for planning.

You are correct that, where possible, you need to strike a balance between living now and planning for your future. However, I think that your current circumstances tip this balance in favour of dealing more with the present than the future, although this should tip the other way when the current economic woes subside.

There are some areas where you should not compromise if at all possible. For instance, if you are already in a pension scheme where employer contributions are contingent upon you making a personal contribution you should only stop your contributions as a last resort.

As you cannot access pension funds until age 55, you should also use savings vehicles which can give you access to money. If you are likely to need access to savings in the short term I would suggest utilising your annual cash individual savings account (Isa) allowance. This would allow you to receive tax-free interest on savings of up to 5,340 this tax year.

If you could afford to tie a portion of your cash up over a longer period, you could also consider National Savings & Investments Index Linked Certificates. These offer a guaranteed return above inflation of up to 0.5 per cent. Although this may not sound too appealing, virtually all savings accounts currently pay interest rates which are significantly lower than inflation, meaning the spending power of the money is diminishing. In addition, returns are tax-free which offers an especially attractive risk-free option for higher rate taxpayers, who suffer 40 per cent tax on interest in savings accounts.For money that you wish to save over the longer term, a combination of pension and investment Isas could be suitable. The choice of investments is obviously key and would depend on your circumstances, objectives and attitude to investment risk. I would suggest that you seek independent financial advice to evaluate your options.

• Stephen Hall is a wealth manager within Cornerstone Asset Management at HBJ Gateley.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd, Cornerstone Asset Management LLP and HBJ Gateley accept no liability on the basis of this article.