Fight The Cash Crunch

Thanks to higher taxes, interest rates and household bills, our personal finances are being squeezed. Here's how to ease the pressure.

The budgets of British consumers are under more pressure than at any time since 2003, according to Ernst & Young. The accounting giant's latest Annual Discretionary Income Study reveals a continuing decline in consumer spending power. After deducting income taxes, mortgage repayments and monthly household bills, a typical UK household now has just two-ninths (22%) of its pre-tax income remaining, compared with two-sevenths (28%) in 2003.

Ernst & Young (E&Y) warns that our personal finances are being squeezed tighter than at any time in the past four years. This is largely down to rising taxes, higher interest rates (due to four hikes to the Bank of England base rate since last August) and sharply higher utility bills.

Other costs which are on the rise include Council Tax bills, water rates, pension contributions and fuel prices. Thus, even though wages are rising at something like 4% a year, higher inflation (the tendency of prices to rise over time) means that many of us have less cash to spare this year than we did five years ago.

What's more, homeowners are undergoing a double whammy, thanks to much bigger home loans plus mortgage interest rates which are 1%+ higher than they were before this round of rate hikes began. Higher interest rates also make non-mortgage debts more expensive, with interest rates rising on credit cards, personal loans and overdrafts. Thus, anyone with hefty debts will really be feeling the heat.

Here's E&Y's analysis of what's piling the pressure on our monthly spending:

• Mortgage repayments: up two-thirds (65%) since 2003 to £699;
  
  
• Pension contributions: up 65% since 2003/04, from £144 to £239;
  
  
• Petrol costs: up an eighth (12%) since 2005/06 to £156;
  
  
• Council Tax: up a fifth (20%) since 2003/04 to £110 for a Band D property; and
  
  
• Other debt repayments: up more than 30% since 2003/04 to £104.

However, it's not all bad news: after peaking in 2006, gas and electricity prices are falling this year. In addition, home-telephone charges are in decline, and car running costs have dropped in the past twelve months, thanks to competitive pressure on servicing and tyre prices.

So, what can you do if your cash is under the cosh? If your finances are feeling fragile, I believe that it's better to make voluntary cutbacks yourself, rather than have them forced on you. To get started, make a detailed list of where your money goes. This will involve trawling through your bank and credit-card statements, or even keeping a spending diary for a month.

Once you've identified where your expenditure is greatest, look for ways to curb these costs. For starters, you could:

1. Hammer your home loan with the Fool's award-winning, no-fee mortgage service;

2. Cut your credit-card interest by transferring your existing debts to a 0% credit card;

3. Prune your premiums for car, home, life, medical and travel insurance;

4. Pay less interest and avoid annoying overdraft charges with a better bank account;

5. Stick your savings in a high-interest account ; and

6. Grab great-value gas and electricity tariffs.

Finally, for more ideas on keeping the wolf from the door, visit our excellent Dealing with Debt and Living Below Your Means discussion boards, where the advice of thousands of helpful Fools awaits you!

More:Ten Ways To Become Richer | Debt And Destruction!