Ease the squeeze on day-to-day living by cutting your outlays

Incomes have flatlined to such an extent that the average household will be no better off in 2016 than in 2002, according to the Institute for Fiscal Studies (IFS). Britons are suffering the worst squeeze on living standards since the mid-1950s, with disposable incomes down 7.4 per cent in just three years.

The average middle-income family with two children will have £2,500 less to spend in 2012 than in 2009, while couples without kids will be £1,800 worse off, the IFS claimed.

But while there’s not much you can do about inflation, spending cuts, unemployment, pay cuts and wage freezes, you can take practical steps to bridge the income gap.

From taking advantage of tax breaks to cutting household bills and making a weekly budget, you can boost your spending power without having to change your lifestyle.

Derek Smith, director of Edinburgh-based IFA Melville Hutchison, said: “If you’re looking to save some of your hard-earned cash, treat it like a project and divide it into two sections: short term, things you can do immediately to save money; and medium term, ways that you can arrange your finances in order to make longer-term, but perhaps greater, savings.”

Here are some of the main areas to look at if you want to protect yourself from the worst of the income squeeze.

Day-to-day items

This is about cutting down on unnecessary expenditure, rather than not doing things you want to do. Taking a packed lunch to work or skipping the morning takeaway coffee is the classic example, typically saving between £3 and £6 a day and up to £30 a week.

If you drive to work and have to fill your car up regularly, you may be able to find a cheaper place to do it. At petrolprices.com you can enter your location to find the cheapest fuel option in your area.

For example, the most expensive unleaded price in Edinburgh yesterday was 134.9p, compared with the cheapest, 6p a litre lower at 128.9p. Filling up a 40 litre tank at rhe latter would cost £51.56, £2.40 less than the most expensive option. Assuming weekly visits, that’s a saving of almost £10 a month and more than £115 a year.

Canny supermarket shopping can also keep the costs down. From taking advantage of two-for-one deals on perishables (such as toothpaste, toilet roll and cleaning items) to switching to own-brand goods or swapping Waitrose for Aldi and making a list (and sticking to it), it’s surprising how much you can take off the weekly food bill.

You can also compare prices before you shop, by using sites such as Mysupermarket.com to check exactly how much you have to pay for the items you need at the different big name stores. It claims users can cut up to a fifth off the cost of their weekly shop by getting different goods from different stores.

Smith strongly recommends reviewing your budget to identify needless costs. “If you don’t save 30 per cent on expenses by doing this, you’re not really trying. Get your most recent bank statements out and review all of your direct debits: do you actually get value from that gym membership right now? Do you need Sky TV? How much is your TV, broadband, telephone costing you per month?”

Also make sure you’re not paying direct debits for things you no longer need or use, such as magazine subscriptions, gym memberships and other regular payments.

House and home

Whether you own or rent, your home is probably your biggest expense. Mortgage payments are generally out of your control unless you’re on a standard variable rate or coming to the end of your fixed rate deal. If that’s the case, look around for a better deal, speak to a mortgage broker and (especially if you don’t have much equity in your home), tidy up your credit record to give yourself the best chance of being accepted for a competitive loan.

If you don’t have any debts, it may also be worth overpaying your mortgage. Increasing your payments while interest rates are low could cut years off your mortgage term and save you thousands in the long run.

“Mortgage and other debts need to be reviewed to ensure that you are paying the minimum rate of interest possible, but be careful of switching to low rates that might also carry high fees,” said Smith. “If you have some savings put aside, you should consider an offset mortgage, which could save you hundreds a year.”

Then look at your bills. Energy costs are likely to be the biggest but the good news is that unless you’ve switched recently, there’s a strong chance you can slash your bills by changing supplier, or even moving to a different tariff with your existing provider. Websites such as energyhelpline.com, uSwitch.com and confused.com allow you to enter your energy usage details to compare the various tariffs on the market.

With about £300 between the cheapest and most expensive deals available, there are serious savings to be made. The most affordable deals will involve paying monthly by direct debit.

Home communications packages are worth looking at too, as a price war among the biggest providers means the cost of bundled packages – where TV, phone and broadband are tied into one deal – are gradually falling.

Tax

Britons waste £1.3 billion a year by failing to take simple tax-efficiency measures, according to the latest Tax Action report from unbiased.co.uk. A failure to plan for inheritance tax, claim tax credits and benefits and taking advantage of allowances such as those on Isas and pensions are among the most common ways in which millions of people pay more tax than they need to.

Tom Munro, owner of Tom Munro Financial Solutions, urged anyone hoping to boost their household income to look closely at tax planning. He pointed out that too few married couples take advantage of the ability to move assets between each other tax-free.

“Stocks and shares, along with unit trusts, are a good example of transferable assets. By assigning some of these assets to a non-taxpaying spouse from a higher rate tax-paying husband will significantly improve income as the current capital gains tax exemption [£10,100 for 2011-12] effectively doubles up, allowing up to £20,200 to be draw down as income each year tax-free.”

Debts

Mortgages, credit cards and loans are being paid down at record rates and the appetite for new borrowing has shrunk dramatically as more people move to shore up their finances.

Some ways of doing this are more effective than others, however. Focus on clearing the most expensive debt first, for example, whether it’s a costly personal loan, an overdraft or credit cards. Also resist the temptation to settle only the minimum balance each month, as the interest charges accumulate rapidly.

One option is to transfer the balance to a card offering 0 per cent on balance transfers, so you can repay the debt without piling up more charges.

But avoid spending on the card, as purchases attract higher interest, and try to clear the balance during the set period, which is usually between ten and 24 months.

Saving & Investing

Interest rates may be low, but if you’re paying into a cash account without using your annual Isa allowance, you are allowing tax to eat into your returns unnecessarily. Also, make sure you’re getting the best rate – millions of people leave their cash in accounts paying about 0.1 per cent. Shop around for a better rate; several providers currently pay around 3.5 per cent on cash savings.

Bigger gains are available if you feel comfortable with using social lending websites, where savers can lend to borrowers in return for rates averaging above 7 per cent. The likes of Zopa, Funding Circle and Ratesetter have become increasingly popular over the past two years and all have ways of ensuring savers’ money is protected.

Non-taxpayers should make sure they aren’t paying tax on their savings, said Munro. “The simple completion of HMRC form R85 will ensure any interest is credited gross. Even though current interest rates are derisory, better in your pocket than HMRC’s. But look around for better rates; Nationwide’s current rate of 3.12 per cent on its online My Save account may suit those who have already used their annual cash Isa allowance.”

If you can, save into a company pension. If the employer pays in contributions as well, it would be akin to rejecting a pay rise if you did not take advantage. That means 40 and 50 per cent rate taxpayers can effectively pay £50,000 into a pension at an effective cost of just £30,000 and £25,000 respectively.

Quick cash

Protecting the money in your pocket doesn’t have to be all about watching your spending. Millions of people are pulling in extra cash merely by going through “cashback” websites when they buy products and services online.

If you’re signed up to cashback websites (such as Quidco, Topcashback and rpoints) you can check them before you buy something online to find out if the vendor you’re making the purchase from is an affiliate. If it is, click through to the retailer’s website from the cashback site and earn cashback points or a discount. Affiliates include most of the UK’s biggest retailers, restaurants, entertainment brands, travel companies and financial services providers and cashback ranges from 2 to 25 per cent.

As long as you only buy things you were getting anyway, it’s an easy way to make money for nothing.