The cost of living crisis is dominating headlines right now. With so much conflicting information floating, it's not easy to sort out what's the the easy way take care of your household finances.
Banks, energy providers and shops will frequently try to blind you with big numbers and confusing mathematical terms – often preying on people's anxiety about mathematics. However, even though you count yourself as a numberphobe, there are some very simple things you can do to use maths in your favour and reduce your cost.
The challenge with averages
For most people, the biggest effect on living costs will come from hikes in gas and discovered another means. This is tied to the price cap, that is set by Ofgem. But a lot of the reporting around this cap is somewhat misleading.
Last week, the October price cap was announced to be lb3,549. But that prices are according to a typical household. The nature of an average is the fact that roughly 1 / 2 of households will use more energy than this, and roughly half uses less.
Therefore, it's very useful to have an idea of methods much energy your personal household actually uses each year. If you have lived in the same house for a long time, you can look at your usage over previous years as a guide. If you're in a new house, you may make an estimate by factoring in the size of house, number of individuals who live there and other information utilizing an energy consumption calculator.
Your energy bill for every type of fuel is based on two values – a daily standing charge (SC), that you simply pay every single day no matter usage, and a cost per unit of one's (CPU). Once you know how many units (u) of that fuel you use each year, it is simple to calculate your expected bill for any given year by computing (365 x SC) + (u x CPU).
Know your percentages
Another huge contributor to living costs crisis may be the rocketing inflation rate, which currently sits at 8.8%. In reaction for this, the financial institution of England has raised its base rate to 1.75%, which has a knock-on impact on rates of interest on savings and loans.
The impact of this change in the short term depends on whether you are in net debt. If you have more income in savings than in loans (as well as your mortgage, student loans etc), then it's possible the elevated rate of interest provides you with an opportunity to address a few of the impacts of inflation. However, when the opposite is true, and particularly for those travelling towards the end of the fixed-rate duration of a mortgage, then you'll probably be a lot worse off than you are now.
The easiest method to examine the impact would be to look at the rates of interest related to all of your accounts. For a checking account, a 2% rate of interest on a balance of lb100 will leave you with lb102 after the entire year. Whether it's financing, you'll owe lb2 more. For those who have both however the savings account includes a lower interest rate, then it may be inside your interest to use a minimum of some of those savings to repay your loan.
However, most loans – including most mortgages – are repayment loans, which means you borrow a specific amount after which repay it on the pre-agreed period, based on a particular formula. The way in which such loans are structured means the initial few payments will see nearly all your money going towards the interest, using the overall balance being reduced by only a bit. For a lb150,000 loan at a 4% interest rate over 25 years, your monthly payment could be lb791.76 – as well as in the first month, lb500 of this would be interest.
Therefore oftentimes, if you are in early stages of a mortgage and also have the capability to overpay, you may save yourself much more money in the long run. You should use mortgage calculators to look at the amount of your payment per month actually goes towards paying off your debt.
Divide and conquer
The aisles of huge supermarkets can be confusing places, with different versions and sizes of the identical product available at an array of prices designed to bamboozle you. For instance, the sodas aisle of my local shop often includes 2-litre, 1.5-litre, 1.25-litre, 1-litre, 600ml and 500ml bottles, plus 330ml and 150ml cans sold individually as well as in multi-packs.
Although it's typically correct that the larger sizes are better value (and for that environment given that they use less packaging), this isn't always the case when you element in special deals. A simple tip that will work with any non-perishable product is to calculate the price per unit so you have an immediate comparison.
For example, if your 2-litre (2000ml) bottle of cola costs lb1.75, that means the cost per 100ml is 175/20 = 8.75p. The equivalent for any 1.25-litre bottle available at lb1 would be 100/12.5 = 8p per litre, meaning small bottle would be better value in this instance.
In many cases, supermarkets include these costs on the price label to assist you. Even when they don't, it may be worth calculating the system costs more expensive products to save your few quid each week.
Don't expect the unexpected
It could be tempting to consider the possibility riches of winning big in a lottery or hitting the casino, however these are surefire ways to lose money typically. That's because of the statistical idea of expected value – the average outcome you realized should you could theoretically repeat an activity over and over again.
Suppose I suggested a game where we rolled a die, and when it had been a number in one to 5 you had to give me lb1, but if it was a six you'd get lb2. Clearly that wouldn't seem like a good idea since I would win most of the time, so your “prize” to get lucky isn't high enough. But exactly how do we understand what prize would be sufficient? That's where our expected value is available in.
Think about the first example. All six outcomes from throwing a die are equally likely. Within the six outcomes your profit is lb2, but in five from the six outcomes you lose lb1 (i.e. possess a profit of -lb1). We can use some simple probability to calculate your expected profit from farmville:
E(profit) = (-lb1 * 5/6) + (lb2 * 1/6) = -lb1/2 (or -50p).
On average, every time we play, you'll lose 50p. But using the same equation, when the “prize” for rolling a 6 is increased to lb5, then E(profit) = 0. On average, you will now break even from this game. A prize of lb8 gives E(profit) = 50p, meaning that typically you would win 50p every time you played.
We can apply a similar concept towards the National Lottery, where the likelihood of matching six numbers could be calculated using some slightly more complicated probability. According to this, the expected worth of a lb2 lottery ticket on August 27 was 95p – if this draw was repeated over and over again, you'd lose over lb1 every time. Therefore, the lottery should not be considered anything more than a little bit of fun, except perhaps on the rare exceptions where there is really a large rollover prize.
Similar concepts affect an online casino, in which the house introduces measures created specifically to weight the chances in the favour. For instance, the existence of the 0 on the roulette wheel means the expected value from the lb1 bet on the particular number is 97.3p – in other words, you lose over 2p per spin typically.
Ultimately, it will be considered a very challenging winter for most of us. The primary way the country can overcome this crisis is with more large-scale help. But while we wait to ascertain if that really arrives, all we can do as individuals is make small changes, and of course help out others less fortunate than ourselves.
This article is republished from The Conversation. Browse the original article.
