How to beat inflation

Inflation means that the cost of living is going up, and that your money doesn't go quite so far. But there are ways to beat it.

Inflation-proof your savings

Inflation is always bad news for the nation’s savers. That’s because inflation eats away at the returns from your cash.

The solution is to find a home for your savings that offers a higher return than inflation. For example, if inflation is at 2%, you’ll need an account that pays at least 2.1% AFTER tax in order to get a return in real terms on your money. It can be tricky to find accounts that do so.

However, one brilliant way to beat inflation is with an index-linked bond.

A number of providers offer these, and they work in a very simple yet effective way.

Here’s the deal. You lock your money away in the bond for a number of years, generally between three and five years. And each year you will have interest paid on your cash, as with any other type of savings product. However, here’s the clever bit – the amount of interest you will earn is determined by state of inflation.

So you will earn a certain percentage above inflation on your cash each and every year. For example, the provider may offer a bond paying 1.5% above the Retail Prices Index (one of the measurements of inflation). If in a year’s time the Retail Prices Index stands at 4%, your savings will enjoy an interest payment of 5.5%! It’s a brilliant way to guarantee that your savings will beat inflation and make real term gains.

Avoid paying tax

If your money is not stretching as far as it once did, it pays to keep as much of it in your pocket, and out of the hands of the taxman! The simplest way to do this is by making full use of your ISA allowance.

Cash ISAs are savings accounts, but with the crucial difference that the interest you receive on your cash is not subject to income or capital gains tax.

Each person over 16 currently has an annual cash ISA allowance of £5,760 for the 2013/14 financial year. But if you don’t use up this whole allowance by the end of the financial year, you’ll lose it.

Your £5,760 cash ISA allowance is actually just part of a full ISA allowance of £11,520. You can split this allowance between a cash ISA and a stocks and shares ISA or use it all in a stocks and shares account.

And by using an ISA, you can really fight back against inflation. Making use of your allowance means the money that you would have been handing over to the taxman with a traditional savings account is instead still in your hands, boosting your income.

Alternatively, you could make use of your pension. When you save money into a pension, it enjoys tax relief. For example, if you’re a basic-rate taxpayer and pay in £80, the Government will add an extra £20. So not only do you avoid paying tax, but you actually enjoy a tax boost on your cash!

Cut your costs

When things are getting more expensive, an obvious way to beat those rising costs is to find cheaper alternatives. This means taking a little more time to shop around for the best deals.

When doing your food shopping, for example, you may want to try a cheaper supermarket, perhaps one of the deep discounters like Lidl or Aldi. Alternatively, make use of websites like MySupermarket to compare which supermarket will get you your basket of goods the cheapest, while you should also check out our weekly Frugal Food blog.

It’s not just food though – take a look at exactly where your money is going each month, and see where there are opportunities to reduce it. A good way to do this is to make use of our MoneyTrack tool. With MoneyTrack, you have all of your accounts in once place, with charts showing you exactly what you are spending your money on. You should soon be able to find a few places where savings can be made.

You should also take a look at your monthly bills. Are there cheaper alternatives out there? Perhaps you are coming to the end of your mortgage deal, and could remortgage to a more competitive rate? If so, check out our mortgage centre where you can compare deals from across the entire market.

Or perhaps your gas and electricity tariff has gone up? Why not take advantage of our energy quote comparison engine? We also have quote engines for home insurance, car insurance, life insurance and travel insurance quote comparison engines to help you find cheaper deals.

Get more money

When your money is not stretching quite so far, another alternative is to try to increase how much money you have at your disposal.

Pay rise
You could try asking for a raise from your employer. It’s not an easy thing to do, particularly in the current climate, but if you present a compelling case there’s no reason you shouldn’t be able to squeeze a few extra pounds a month out of your boss! For a great guide on how to go about securing a better salary, have a read of Six top ways to pick up a pay rise.

But don’t just limit yourself to trying to increase your income from your employer – there are plenty of other ways to make a few quid extra.

Rent it out
There are many things you can rent out to earn a little extra cash. For a start, if you never use your driveway, you can rent it out to drivers by using websites such as Your Parking Space, ParkLet or Park At My House. These websites will match motorists looking for parking with homeowners who have a driveway to spare.

Depending on where you live, you could earn between £50-£300 a month, according to Your Parking Space.

Alternatively, if you have a garden that you never use or some spare storage space, you could also rent this out. Take a look at Spareground for more information.

Take in a lodger
Leading on from this, if you have a spare room, the government’s Rent a Room scheme allows you to receive up to £4,250 a year tax-free (£2,125 if you’re letting jointly) for renting out the room to a lodger. You don’t even have to be a homeowner to qualify for the scheme.

You can advertise your spare room on websites such as Easyroommate, Gumtree, and MondaytoFriday. Find out more about this in Rent A Room scheme: tax-free cash from your spare room.

Sell your junk
Most of us have some kind of junk lurking around the house. So why not give your home and your garden shed a good clearout to see what you can find?

You can sell on your unwanted items in numerous ways. Firstly, you could try your luck on auction sites such as eBay, eBid and Amazon. If you’re selling larger items – perhaps you want to get rid of your bike, for example - you could also place an advert on websites such as Preloved and Gumtree.

You could, of course, also sell your items at a car boot sale. Take a look at CarBootJunction to find where your nearest car boot sale is located. Alternatively, if you’d prefer to stay in the warmth, you could try an online car boot sale!

Host a party
How about earning some extra money by throwing a party? If you sign up to become a consultant with The Body Shop, you can then start hosting parties and earning money by selling The Body Shop products. 

The Pampered Chef, Avon, Jamie at Home, and Usborne Books operate similar schemes and are well worth investigating if you’re after an easy way to boost your income. Take a look at Make money from parties for more information.

Get a second job
Perhaps the most obvious way to up your pay is to get a second job. However, before you do this, find out whether you can get any paid overtime or an extra shift from your current employer. This will work out to be far easier.

If that’s not possible, however, keep an eye out in newspapers and online for part-time evening or weekend work – perhaps you can pick up some casual work in a supermarket or restaurant. Just make sure this doesn’t interfere with your full-time job.

Earn cashback
If you often shop online, why not get rewarded for your spending? Websites such as Quidco, TopCashback and GreasyPalm allow you to earn cash back when you’re buying items online.

What’s more, if you use a cashback credit card, you’ll earn even more money back as you shop.

Claim your benefits
It’s worth taking a look at independent advice website, Turn2Us, to see whether you qualify for any benefits. If you have children, care for elderly or disabled relatives, have health problems, or you are on a low income, you may be able to claim.

The GOV.UK website also has some useful information.